The health of the Indian economy is closely linked to that of the agricultural sector. Agriculture constitutes about 22 % of the GDP of the country and hence a drop in agriculture production by 4.5 % will necessarily translate as 1 percentage point drop in GDP. But the impact does not stop there. There are several demand and supply side linkages that are affected by the changes in agricultural production. Since 70 % of the population are directly or indirectly dependent on agriculture, their purchasing power is determined by the performance of the sector. Thus increases in agricultural production will mean increased rural income that will then result in greater demand for the goods and services produced by the secondary and tertiary sector. Positive correlations with increase in farm income have been established through studies in the case of sale of large variety of products like shampoos, soaps, bicycles, televisions, radios etc.

On the supply side, increased agricultural output naturally results in more marketable surplus of cereals, fruits, meat, eggs, vegetables etc. and appear on the plates of both rural and urban consumers in larger quantities. The increased output also result in lower prices, due to several reasons like perishable nature of agrarian products, the need for money, the propensity to convert produce into cash, the lack of storage facilities, seasonality of markets, etc. While this phenomenon will result in a less than proportionate increase in the income of farmers, (in relation to the increase in production), it may result in increase of real income of net buyers of agricultural produces. Thus, both the farming community as well as the net buyers of food shall have increased disposable income to spend on non-agricultural products.

In addition to such inter sectoral linkages, agriculture also provides raw materials to several industries like sugar, jute, cotton textiles, oil, milk products, fruit and vegetable based industries etc. Abundant availability of raw material at lower costs will result in higher production in the secondary and tertiary sectors.

Thus the developments in the agricultural sector influences the performance of the other sectors directly. While increase in agricultural income creates buoyancy in other sectors, depressed income levy a heavy toll. The demand for goods automatically reduce. But, since production systems in the secondary and tertiary sector has to carry significant element of fixed costs, either it will lead to industrial sickness or rise in prices.

On the other side, when agricultural income increase, large numbers of marginal and small farmers are able to move from thrift to real savings, which improve risk taking ability. Thus, if agricultural income can be increased on a sustained basis, the conditions for entrepreneurial development, adoption of better farming techniques, etc. will improve. This will eventually cause the migration of population from farm sector to non farm sectors. It will also result in better wages to those who continue to depend on agriculture.

2.OVERVIEW

Any analysis of the status and prospects in agriculture brings into stark focus the dominance of the small and marginal farmers. These households also constitute the bulk of the rural poor in our country. It is seen that significant level of increase in income may not be achieved by improving the yields in their small operational holdings. This is the result of two factors. One is the fact that possible rise in yields in the existing crops will not result in any substantial increases in income. The second factor is that the small holdings do not render itself to exploit much of the technology and sophistication that has brought rich dividends to the larger farms with the same crops.

There is thus an imperative need to expand the base of the rural economic activities of these farmers. They will have to find economic activities beyond the crop production activity, which will increase employment and income. Such grass root level diversification will result in making the small and marginal farmers economically viable.

With India refocusing its attention on agriculture, and with a deepening recognition that only a vibrant agriculture sector shall sustain the robust growth of the secondary and tertiary sector, all major institutions directly or indirectly linked to development have to pick their lessons from the issues and the prospects of the agrarian sector. Dominant institutions in the financial sector like the banking sub sector, will have to reorient their business processes to meet the challenges posed. In this context, the average banker also needs to expand her/his comprehension and perspective of changes needed and emerging in the agrarian economy of our country.

Despite the passage of almost 5 decades of planned development (including the 10th plan terminating in 2007) and a plethora of programmes, the Indian agriculture continues to be beset with the most basic problems germane to least developed economies.

The most significant feature is the population dependency.

Table 1: Population dependency and per capita GDP in primary sector

Particulars

1950-51

1980-81

2003-04

Agriculture share in GDP

57.7

39.78

22

Population dependent on agriculture %

77

70

67

Estimated population dependent on agriculture (crore)

28.5

59

71

Per capita sector contribution to GDP (approximate) Rs.

2991

4096

7850

The absolute numbers dependent on agriculture, in fact, have increased by 2.44 times between 1950-51 and 2003-04. It is empirically clear that the pattern of GDP expansion in both the tertiary and secondary sector has not facilitated shifting of population from primary to other sectors. One major reason is that our secondary sector which would have supported agriculture and rural sector activities never expanded in any significant manner as shown below. This is evident as we look at the contribution of the secondary sector to GDP across time. In 1950-51, the sector contributed 14.8 % which increased to 23.7 % in 1980 –81, and decreased to 16 % in 2003-04.

A rapid and substantial expansion of such activities would have resulted in three fold benefit to the agriculture sub system in addition to creating structural employment:

(1) Manufacturing sector dependent on agricultural sub sectors for raw materials would have resulted in large scale increase in the production. This would act as incentive for positive action for yield improvement in high value crops amenable for use as raw material for processing and manufacturing.

(2) Generally speaking, the high value crop returns more income per unit area on the one hand and is labour intensive in comparison to grains on the other. This means that both the farmers and the farm labour gets to enjoy more income.

(3) The expansion of the secondary sector, particularly those sub sectors interlinked with agriculture outputs and rural labour would have resulted in the sectoral migration of population from primary to secondary.

The paradigm of development in India saw bypassing of the manufacturing sector and rapid expansion of the tertiary sector. Even within the tertiary sector, the sub sectors that provided greater impetus to the GDP growth absorbed only highly educated and technically skilled individuals. An explicit example of this is the Information technology sector which is expected to grow at geometrical proportion from Rs.87000 Crore in 2003 to Rs. 247000 Crore by 2008. The Indian rural population was virtually by-passed in participating in the growth of these sectors. An analysis of this phenomenon is beyond the scope of this paper, but the need to take a hard look at the paradigm of growth cannot be gainsaid.

The second feature leaving India far behind the developed world is the continued severe incidence of seasonal unemployment and under-employment in agriculture. Unfortunately, increasing the production and productivity may not make any significant dent in this situation. This is because the pattern of employment will not change. Studies have shown that the rate of increase in employment ranged from 0.4 to 0.5 with one percent increase in output.

It is also to be appreciated that the past half century witnessed the near total collapse of the joint family system. The result is the continuing fragmentation of agricultural holdings. The average holding size has shown a steady decline over the years. It is evident that the advantages of scales are not available to the vast majority of the farmers. This, automatically, through pure economic logic, result in depressed earnings in the sector due to low productivity.

Monoculture is another contributory factor chaining the sector to its underdeveloped bedrock. In spite of innumerable plans and programmes supporting irrigation, only 40.5 % of the net cropped area in the country is irrigated. The cropping intensity has only marginally improved, but remains much below what is possible with assured moisture availability.

Table 2. Net cropped area and Irrigated area

Million Heactare

Particulars

1950-51

1980-81

1999-2000

NCA

118.75

140.00

141.23

Net Irrigated area [A]

20.85

38.72

57.24

Gross Cropped Area [B]

131.89

172.63

189.74

Cropping Intensity [ B/A %]

111.10

123.30

134.30

Land use data : Ministry of Agriculture , Govt of India

3.DIVERSIFICATION

While bulk of the agrarian/rural economy is subjected to symptoms of underdevelopment as stated above, there are several sub sectors which are making strides of progress.

The advent of the reforms with liberalisation, and globalisation as its major planks, have brought many changes in the demand pattern for goods and services. It is seen that the Indian consumption basket is now getting richer in fruits, eggs, milk, meat, processed foods etc. in addition to cereals. This shift in demand is seen not only in urban and semi-urban, but also in rural areas.

This provides us an insight into the segments available in markets. The changes in the consumption patterns and the emergence of several market segments ­­ give rise to possibilities for diversification of products and services, including in agricultural sector. The major drivers of such diversification in agriculture can be divided into demand side and supply side drivers.

Demand side Drivers

i. Urbanisation

Several studies reveal that the production pattern undergoes changes in the urban, near urban and rural areas. Studies by Parthasarathy et al (2002) shows that the production of fruits and vegetables are more in areas proximate to urban and near urban areas as compared to remote rural areas.

ii. Education and Exposure

With increased awareness, there is a developing market segment looking for healthier diet, processed foods, better quality of every day consumption items, etc. There is, in fact, the desire to realise ”push demand" in several segments of the rural market, which offer opportunities for diversification of products including agricultural produces.

iii. Income Levels

The increasing rural income also tend to both increase pull demand, make the realisation of push demand easier and also create new market segments.

Supply side Drivers

i. Infrastructure

The growth and development of infrastructure provides better facilities, access, cost-effectiveness etc. leading to favourable conditions for diversification. Such infrastructure include roads, water and irrigation, markets, energy, financial service providers, extension mechanism as well as network of outlets, information technology, transport, storage etc.

It is obvious that there is a cyclical relationship between the development of infrastructure, the diversification of products and services and expansion of demand.

ii. Changes in Technology

The access to post harvest technologies is another important driver for diversification and value addition. The improved shelf life, quality and better prices trigger this diversification.

iii. Relative Profitability

As the markets get segmented, and access to technology improve, the choices for agricultural production also improve. Based on the profit potentials, even small and marginal farmers are able to choose cropping patterns and crops. Thus, the potential profits act as catalyst for diversification.

iv. Small Holdings

The presence of very large number of small holdings abetted by the continued shrinkage in the average holding size propel small and marginal farmers to take up subsidiary activities to smoothen income curves. This stimulates the search for diversification of enterprise, both farm and non farm sector as well as the search for employment. Both the factors positively impact diversification.

However, there are also several constraints in accelerating the process of diversification in agriculture sub system.

1. Some of the drivers for diversification have been discussed above. It is evident that the availability of several favourable conditions are necessary to speed up the process. This results in the emergence of pockets with accelerated development (read diversification) based on the conditions prevailing. Thus diversification is not taking place on an equitable basis.

2. High transaction costs are another reason for the slow down in diversification. These transaction costs can be tracked to losses in post harvest handling, costs due to remoteness of market access, costs on borrowed capital, particularly due to dependency on informal sources etc.

For example, it is estimated that approximately 10 - 15% of the food grains produced is lost (i.e. about 25 m. tons). The estimation is much higher at 30 to 40% in fruits and vegetables.

3. Lack of Infrastructure : Similarly micro level studies show that the lack of market access lead to distress sale of market surpluses. Though 54% of marketable surplus is estimated to be contributed by small and marginal farmers, it is empirically seen that about 50% of such surplus is subjected to distress sales. The causes of this are many - lack of market, poor access, lack of institutional support, poor access to technology, lack of storage, lack of alternative income sources etc. are some of the reasons.

4. THE CHANGING AGRICULTURAL SCENE Signs of Transition

Parallel to the underdeveloped segments there is also emerging vibrant, pro-market sub sectors in agriculture. While the underdeveloped segment demand a deep understanding from a developmental point of view albeit linked to inter sectoral dynamics of growth, the emerging sectors ask for different competencies. These revolve around in-depth understanding of market forces, domestic and international demand, competition and price, cost-effective technologies, internal competencies, etc. Linkages with institutions involved in development of these sectors, access to sector based current information etc. are also necessary. It will be seen that those engaged in agriculture/rural sector financing is expected to have widely divergent capabilities and skills.

The emerging changes are discussed in brief below.

(i) Dietary Mix Changes

It is seen that with increase in per capita income in general and emergence of pockets of moderate to greater affluence in particular the dietary mix and its flavour of the Indian consumers is changing fast. It is seen that there is significant growth in the consumption of meat and egg, fruit, milk and vegetable as shown below. The change is much more pronounced in the case of all rural consumers.

Table 3: Changes in Dietary Mix

Kg. Per capita

Low Income Group1

All Rural Consumers2

1983

2000

% Growth

1983

2000

% Growth

Meat and Egg

1.9

3.8

100 %

3.9

6.7

72 %

Fruit

1.6

4.2

163 %

2.8

9.6

243 %

Milk

15.7

20.5

31 %

37

63

70 %

Vegetables

36

54

50 %

46

74

61 %

Source : 1 Kumar and Mrutyunjaya 2002; 2 NSSO 1999-2000

Similar trends are available for urban centres too. In addition to the changes in the commodity off-take, the urban and to a limited extent, the near urban markets are showing segmentation linked to prices and quality.

(ii) Export of high value commodities

The sector is also witnessing a massive expansion of exports of high value commodities.

Table 4 : Growth in Exports

Exports in Million USD

1981-82

1991-92

% Growth between 81-82 and 91-92

1999-00

% Growth between 91-92 and 99-2000

Egg

0.4

0.2

-

25.3

12550 %

Processed Fruits

45

119

164 %

145

21 %

Meat

75

79

5 %

198

150 %

Fruits and Vegetables

110

120

9 %

263

119 %

Fish

320

461

44 %

1125

144 %

The expansion of exports creates opportunity for linked development of several areas like storage and transport infrastructure, cold chain, packaging, quality control, technology, technical skills, marketing arrangements etc. All these areas have high investment potential.

(iii) Expanding Food Chain

With changes in consumption basket, the production mix induced by various drivers, the expansion of exports, segmentation of markets etc., the food chain is also expanding. This is on account of higher degree of processing, grading and packing.

The production - market linkages has hither-to been dominated by middlemen, regulated markets or agricultural/produce cooperatives. Contract farming is currently developing into an efficient link with the added advantage of potential to vertically integrate small and marginal farmers with markets.

Contract farming has several specific advantages like :

assured procurement

minimisation of production risks

reduction in risks related to marketing

adoption of new technologies

promote shift of input delivery and agricultural extension system from public to private sector.

AGRI EXPORT ZONES IN INDIA

GENESIS

With the removal of almost all the quantitative restrictions on imports and with the decks cleared for integration of Indian economy with the global one, a need was felt to harness our competitive advantage in international trade.

Agriculture was perceived as one sector where such a potential existed. The provisions of Agreement on Agriculture, implemented in letter and spirit, could create such an opportunity. However, despite the potential, there was a lot to be done to get the supply chain going.

The objective, therefore, was to take a look at an agriculture produce in a comprehensive manner – right from farm to the palate – so as to be able to deliver an appropriately priced and attractively package quality product in the international market. Thus emerged the concept of Agri Export Zone, which found a place in the exim policy announced for the year 2001-2002 as a separate chapter.

CONCEPT

Promotion of agricultural exports is important for creating conditions for providing remunerative prices to farm products. Sporadic efforts have been made in the past for promoting exports of agricultural produce/products from the country. Thus on one hand Research and Development has taken place with little bearing on the development of a particular agricultural produce for the purpose of export, on the other hand financial and fiscal incentives are being provided for exporting a particular produce without actually addressing pre-harvesting and post-harvesting practices.

Though India ranks as the world's second largest producer of horticultural crops, the country fares less impressively on processing fronts. Lack of adequate storage facilities is one of the main problems faced by food processing industry leading to almost 30-40 percent wastage of the production. Simultaneously, most of the varieties grown in India are simply not suitable for processing. Therefore the concept of Agri Export Zones developed by APEDA aims to improve the levels of food processing to reduce waste , increase marketability and help farmers to enjoy higher value of realization. It takes a comprehensive look at a particular produce/product located in a contiguous area for the purpose of developing and sourcing the raw materials, their processing/packaging, leading to final exports. Thus, the entire effort is centered on the cluster approach of identifying the potential products, the geographical region in which these products are grown and adopting an end-to-end approach of integrating the entire process right from the stage of production till it reaches the market.

However, the entire effort begins with market analyses to assess the market potential for that produce. Subsequently, steps are taken to ascertain the quality parameters that are required for making this produce/product acceptable in the international market.

The attempt then is to see what sorts of interventions are required at each stage of the value chain to come up with such a produce/product.

These interventions commence right from availability of inputs like seeds, fertilizers, pesticides, credit etc. This would then entail research into the pre-harvest protocols, if they do not already exist and application and extension of these protocols and practices in the fields of identified farmers.

Development of harvesting protocol, its implementation and the post-harvest management are all critical links in the value chain. These would include activities like storage (both intermediate and final), grading, sorting, processing, packaging and transportation. Each of these activities would involve a specialised intervention, which could be technological (hence would involve research) or financial.

It will also identify/enlist difficulties/ problems encountered at each stage. These difficulties could be procedural in nature or may relate to a particular quality standard. A package needs to be developed to suggest solutions to these problems. Corrective time bound measures will then be delegated to specific government agencies. The APEDA will ensure that the measures are completed on schedule. Export quality products will have specific niche markets identified and will be promoted extensively. Under the programme, international Agricultural experts may also be invited to demonstrate modern harvesting technologies.

Finally, it is the marketing, which is the key to the success. The capability to position the product in an appropriate market and getting an appropriate price would ultimately determine whether the AEZ could get going.

EVOLUTION

What is being sought to be done through Agri Export Zones is nothing new. However, the novelty lies in the fact that this concept does not conform to the traditional understanding of the concept of a ‘zone’ where there is a physical demarcation of boundaries, which are built by brick and mortar. There is also no export obligation on the basis of mere fact of this being an export zone. The obligations, if any, emanate from the licenses which the exporter choose to take. The concept, therefore, is much more flexible. It hinges primarily on ‘convergence’, ‘partnership’ and ‘focus’.

‘Convergence’ relates to putting together of all the ongoing schemes of Central and State Governments to take care of the financial interventions required at various stages of value chain. Thus, whereas the extension and inputs related assistance can flow from Ministry of Agriculture schemes, funds for reefer vans and marketing assistance could come from APEDA. The cold storage could be assisted by NHB and processing plant by Ministry of Food Processing. The idea is to converge and utilize such assistance for an identified produce rather than assisting different products in different places sporadically, without addressing issues relating to the entire value chain.

The ‘partnership’ envisaged between Central Government, State Government, farmer, processor and the exporter lies at the heart of the concept of AEZ. All the players have to come together otherwise AEZs will not work. Each relationship is as important as the other. Thus, consistent supply of produce by the farmer to the processor is a critical link in the value chain. Similarly, the commitments of the Central and State Government and their capacity to deliver and deliver quickly is crucial. All the these players have to work together. Fortunately, perhaps on account of recognition of mutual interest, in most of the AEZs sanctioned so far this partnership is evolving on the right lines, though there is still a long way to go with issues like ‘contract’ farming, which will provide a lasting solution to problems relating to supply chain management, yet to be resolved. However, the heartening feature is the willingness of each player to find such a solution and some models are already emerging.

The ‘focus’ that AEZ provides to agri-export related issues enables a quicker resolution of these issues. There have been a number of such issues at the State, national and international level, that have been sorted out as they were prominently highlighted, consequent to the declaration of AEZs. Reduction of import duty on flowers by EU and reduction in the interest rate on credit to farmers are some such examples.

A variety of interventions, as mentioned earlier, by various agencies mark the development of AEZ. The ‘financial intervention’, in form of various assistance schemes run by a number of Central and State Government organization, enables access to subsidies. Organisations like APEDA, NHB, MOA, DFPI, NCDC and SFAC have provisions for such schemes. Financial assistance gets extended to activities like productivity enhancement, micro irrigation, improvement of quality, R&D, pre and post-harvest training and extension services, maintenance of cool chain, packaging, apart from market development and freight support for selected products.

The ‘fiscal interventions’ come directly from Central and State Governments with the primary objective of enabling duty free access to inputs for the purpose of exports. Thus, the advance licenses become available for sourcing duty free inputs. Facility for concessional duty import of capital goods gets extended not only to direct exporters but also to service providers. The State Governments contribute by way of exemption of all duties, cess and taxes on inputs that go into production for exports.

The ‘monetary intervention’ has come by way of availability of concessional credit (at packaging credit rates) to the farmers. This has been facilitated through a circular issued by RBI.

The ‘administrative intervention’ entails identification of an institution by the State Government for carrying out research for various activities, earmarking of extension teams for the AEZ, clearly specifying and defining the roles of various State agencies, which includes identification of nodal agency to coordinate the work at the state level for executing the project.

The ‘legislative interventions’ become necessary if some laws and regulation have to be amended to facilitate procurement, processing or transportation for exports. The initiative taken by the Government of Uttar Pradesh in enabling direct procurement of agriculture produce by the processors obviating the ‘mandi’ procedure, has gone a long way in promoting smooth procurement. Some State Governments are actively contemplating to bring about a legislation to facilitate contract farming as well. Tamilnadu has already taken the lead.

The Agri Export Zone begins with the preparation of a feasibility report by the State Government. This report is submitted to APEDA, the designated nodal agency for AEZ. After a preliminary evaluation by the Coordination Committee, chaired by Chairman, APEDA, it is put up for consideration to an interdepartmental Steering committee, headed by the Commerce Secretary. Once the project is approved, an MOU is signed between APEDA, representing the Central Government and the State Government. This MOU provides for upfront commitments of the Central and State Governments. A detailed action plan is then worked out for each set of activities. An advertisement is issued by the State Government to solicit private sector investment in the wake of various upfront commitments by respective Governments. Once the private sector entrepreneurs are selected, it becomes a private sector driven zone with the Government and their agencies providing the committed support and interventions. An elaborate web based monitoring system has been evolved to closely follow up each activity on the basis of a PERT chart.

The policy pronouncement was not expected to set the Yamuna on fire. However, the underlying objective was to get the States involved in the process of exports, a task which was hitherto considered difficult if not impossible. All the previous efforts to involve the State governments in promoting exports had not had the desired impact. The attraction in the AEZ was the benefit that was likely to accrue to the farmer. Thus, AEZ became politically acceptable. This also explains the enthusiasm with which the States have taken up the task of setting up these zones. Not many schemes of the Central Government have got going in the first year of the implementation. As many as twenty Agri Export Zones were approved in the first year itself. In fact, surpassing all expectations, exports have already started taking place from some of the zones. The Agri Export Zones have got going, though there is still a long way to go. The concept itself is still evolving and the last word has still to be written.

Measures envisaged to promote exports from such Zone

Financial Assistance :

Both Central as well as State Government and their agencies are providing a variety of financial assistance to various agri export related activities. These extend from providing financial assistance for Training and Extension, R&D, Quality Upgradation, Infrastructure and Marketing etc. Thus, whereas Central government Agencies like APEDA, NHB, Deptt. of Food Processing Industries, Ministry of Agriculture provide assistance, a number of State Governments have also extended similar facilities. All these facilities would have to be devoted and extended to promote agri exports from the proposed Zones in a coordinated manner. Some additional features like providing grants from Market Access Initiative fund could also be considered by the state governments.

2. Fiscal Incentives :

The benefits under Export Promotion Capital Goods Scheme, which were hitherto available only to direct exporters, have now been extended to service exporters in the Agri Export zones. Thus, even service provided to ultimate exporters will be eligible for import of capital goods at a concessional duty for setting up of common facilities. They shall fulfill their export obligation through receipt of foreign exchange from ultimate exporters who shall make the payments from their EEFC account.

Exporters of value added agri products will be eligible for sourcing duty free fuel for generation of power, provided the cost component of power in the ultimate product is 10% or more and the input-output norms are fixed by the advance licensing committee of the DGFT. In view of the power intensive nature of most of the value addition, almost all the exporters of value added agriculture produce will become eligible for such facility. Similarly, input-output norms can also be fixed for sourcing other inputs, like fertilizer, pesticides etc. duty free for cultivation purpose.

NABARD has issued Circular to provide refinance to commercial banks for financing of farmers for cultivation / production of identified crops / commodities in AEZs under contract farming. The banks financing farmers will charge interest not exceeding 10.5% p.a. on their loans under the scheme.

4. ADMINISTRATIVE INTERVENTIONS

These interventions are made primarily by the State Governments for the following :Deputation of scientists for research Identification of farmers Preparation of extension literature Identification of extension teams Extension work. (These tasks can also be undertaken by Pvt. Sector)

5. LEGISLATIVE INTERVENTIONS

Bring about changes in the existing legislation /rules/regulations/to facilitate exportsThe initiative taken by the Government of Uttar Pradesh in enabling direct procurement of agriculture produce by the processors obviating the ‘mandi’ procedure, has gone a long way in promoting smooth procurement. Some State Governments are actively contemplating to bring about a legislation to facilitate contract farming as well. Tamilnadu has already taken the lead.

6. DIPLOMATIC INTERVENTIONS

Negotiate with the international trading partners for providing market access :Reduction in tariffs and subsidies Removal of non tariffs barriers

Benefits of Agri Export Zones :

The anticipated benefits to accrue as a consequence of setting up of such zones are as follows:

i. Strengthening of backward linkages with a market oriented approach.

ii. Product acceptability and its competitiveness abroad as well as in the domestic market.

iii. Value addition to basic agricultural produce.

iv. Bring down cost of production through economy of scale.

v. Better price for agricultural produce.

vi. Improvement in product quality and packaging.

vii. Promote trade related research and development.

viii. Increase employment opportunities.

Novelty of Agri Export Zones

No physical demarcation of boundaries, which are built by brick and mortar. No export obligation on the basis of mere fact of this being an export zone (The obligations, if any, emanate from the licences which the exporter choose to take)Hinges primarily on ‘convergence’, ‘partnership’ and ‘focus’.

Convergence of all the ongoing schemes of Central and State Governments The extension and inputs related assistance from Ministry of Agriculture schemes, funds for reefer vans and marketing assistance from APEDA. The cold storage by NHB and processing plant by Ministry of Food Processing.

Focus: Quicker resolution of agri-export related issues

Examples - Reduction of import duty on flowers by EU reduction in the interest rate on credit to farmers

Operation of the Concept

The entire approach of promoting the Agri Export Zone would have to be taken on a project mode. This would mean that the State Governments would need to identify potential export products which could be selected for development with a cluster approach. State Governments will have to evolve Projects which are feasible and are possible to be implemented immediately. They have also to conform to the indicative guidelines given below. The States will forward such project proposals to APEDA which will conduct the initial scrutiny of the proposals .If found feasible, APEDA may provide necessary guidance in preparing the detailed project report. This report, after preliminary scrutiny, will be placed before the Steering Committee which has been constituted under the chairmanship of Commerce Secretary with the following members:

Once the project proposal of a State has been approved by the Committee, an MOU would be signed between APEDA (on behalf of the Central Government) and the State Government for providing possible assistance at each stage of the project.. The responsibilities of the State government would also be defined in the MOU, a draft of which is under preparation.

Guidelines for State Governments

The proposal of the State Government for developing an Agri Export Zone would need to take into account all activities necessary to set up projects in such a Zone. Some basic guidelines for developing such projects are detailed below:

Identification of a agricultural produce (cash crop) which would be developed for export through a cluster approach. This would, obviously, be based on concentration of production of a given product or a set of products in a particular area which could be promoted as an Agri Export Zone.

The Zone could be a block/group of blocks or a district/group of districts.

An Agricultural University would need to be identified which will assist in the R&D work relating to development of the project. Such University should preferably be in the vicinity of the Zone.

In case of horticulture based projects, an exporter should be identified who would source produce from 100-200 orchards in a contiguous area. In case there are more exporters/ farmers interested in exports, then a single pack house operator or a processing unit to serve the exporters/farmers may be identified.

Efforts should be made to ensure enough production crops to enable the unit to run round the year.

The proposal should indicate the entire range of activities involved in the process, list out interventions being provided by the State Governments at different levels and also suggest the facilitations that can be provided by the Central Government. Interventions from the Centre could be, inter-alia in areas of feasibility studies, setting up backward linkages, training and extension, pre and post harvest activity, packaging, transportation, market promotion, etc.

Responsibilities of the State Government

To enable the Agri Export Zone achieve the objectives of the concept and to make the projects viable, it is necessary that the Central and State Governments work closely with each other. This would imply certain pro-active steps to be taken by the States with regard to the following :

Identification of a State Government institutions/agency, which will be responsible for implementation, and coordination of the entire activity.

Single window problem solving desks should be created in the offices promoting zonal approach to agriculture exports.

Adequate availability of infrastructure, inputs, electricity, etc.

Redeployment of extension officers in the Export Zones who would interact regularly with APEDA and organise training/activity on a regular basis with a definite action programme.

SCHEMES OF APEDA AT A GLANCE :

Schemes for Market Development :

Components

Scale of Assistance

(A)

i) Activity for development of packaging standards and design.

APEDA’s internal scheme for development work through involvement of institutions / organization in India and abroad with the cost sharing with exporters and / or organizations involved in the export promotion. Maximum amount in case of sharing with exporters / organization is Rs.5 lakhs or Rs. 50 /-

ii) Assistance to exporters for use of packaging material as per standards and specifications developed or adopted by APEDA.

50% of the total cost subject to a ceiling of Rs.5 lakhs per beneficiary.

ii) Assistance to exporters & producers for installing quality management, quality assurance and quality control system such as ISO series, HACCP, TQM etc. including consultancy, quality improvement and certification for these.

50% of the cost subject to a ceiling of Rs.2 lakhs per beneficiary for each system

iii) Activities related to standardization and quality control such as preparation of quality assurance manuals, guidelines, documents standards, upgradation and recognition of labs for export testing, certifying exporters as Premium Quality Exporters etc. pesticide management program, national and international standardization activities.

100% internal scheme of APEDA.

iv) Upgradation and recognition of labs for export testing.

For upgradation upto 50% of cost for private labs and upto 100% of the cost for Central / State Government / University laboratories subject to a maximum of Rs.50 lakhs.

Upto 50 % of the total cost of the project subject to a ceiling of Rs. 10 Lakhs.

Schemes of National Medicinal Plants Board - Department of Indian Systems of Medicine and Homeopathy Ministry of Health and Family Welfare Government of India

Promotional and Commercial Schemes of National Medicinal Plants Board

Designated Areas for Financial Support

Project proposals could be submitted in the following designated areas of Promotional / Commercial schemes for overall development of medicinal plants in general and with special reference to 32 species, prioritised and identified by the Board viz:

1

Amla

Emblica Officianalis Gaetrn

2

Ashok

Saraca asoca (Roxb.) de Wilde

3

Ashwagandha

Withania somnifera (Linn.) Dunal

4

Atees

Aconitum heterophyllum Wall. ex Royle

5

Bael

Aegle marmelos (Linn) Corr.

6

Bhumi amlaki

Phyllanthus amarus Schum & Thonn

7

Brahmi

Bacopa monnieri (L.) Pennel

8

Chandan

Santalum album Linn

9

Chirata

Swertia chirata Buch-Ham

10

Giloe

Tinospora sordifolia Miers

11

Gudmar

Gymnema sylvestre R. Br

12

Guggal

Commiphora wightii (Arn.) Bhandari

13

Isabgol

Plantago ovato Forsk

14

Jatamansi

Nordostachys jatamansi DC

15

Kalihari

Gloriosa superba Linn

16

Kalmegh

Andrographics paniculata Wall. ex Nees

17

Kokum

Garcinia indica Chois

18

Kuth

Saussurea costus C.B.Clarke (S.lappa)

19

Kutki

Picrorhiza kurroa Benth ex Royle

20

Makoy

Solanum nigrum Linn

21

Mulethi

Glycyrrhiza glabra Linn

22

Musali Safaid

Chlorophytum borivillianum Sant.

23

Patharchur (Rhiver)

Coleus barbatus Benth. / C.vettiveroides

24

Pippal

Piper Longum Linn.

25

Rasaut (Daruhaldi)

Berberis aristata DC.

26

Saffron (Kesar)

Crocus sativus Linn.

27

Sarpgandha

Rauwolfia serpentina Benth. ex Kurz

28

Senna

Cassia angustifolia Vahl

29

Shatavari

Asparagus racemosus Willd.

30

Tulsi

Ocimum sanctum Linn.

31

Vai Vidang

Embelia ribes Burm. f.

32

Vatsnabh

Aconitum ferox Wall

Proposals could also be taken up for any other medicinal plant for which there is assured market.

Project Proposals can be submitted in the following areas:

I- Promotional Schemes

1. Survey and inventorization of medicinal plants

2. In-situ conservation and ex-situ cultivation of medicinal plants.

To encourage in-situ conservation and ex-situ cultivation of selected medicinal plants, particularly endangered species which have appeared in Indian Red Data Book (IRDB) and negative list of CITES.

Registered growers, association/federations of growers, traders, manufacturers, societies, pharmaceutical companies, NGOs and recognised private research institutes or any group of people who have past 3 years experience in medicinal plants sector.

Financial Assistance to farmers:

In case of farmers financial assistance would be as under:

Small and marginal 50% (operational land area below 2 hectare.)

Medium 40% (operational land areas 2-10 hectares)

Large 30% (operational land area 10 hectares and above)

For the above activities in the case of NGOs, Societies / cooperatives financial assistance would be provided to the extent of 30% of total expenditure, as explained above.

Hand out relevant for Programmes on Financing Agriculture, Agri Exports, Agri Business etc. prepared by C P Mohan, Deputy General Manager and Member of Faculty, Reserve Bank of India, College of Agricultural Banking, Pune. The handout is Developed from information available at http://www.apeda.com/aezcdrom/about-evolution.html and http://www.foodindia.org/agri.asp

Agriculture is closely dependent on the endowment of natural resources and environmental conditions of soil and climate. India is a land of many climates and varieties of soils, affording scope for much diversity in agriculture. It is therefore meaningful to understand the physiographic and agro climatic conditions of India and the various other factors that largely determine the cropping patterns in different regions of the country. Such understanding shall go a long way in optimizing farm production by selectively adopting appropriate cropping patterns and agronomic practices to suit the region. It is also important to gain perceptive knowledge and a pulse feel of the market drivers that promote diversification based on demand and changing dietary regimes of the society. This note is an attempt to put together information on the above aspects.

The climatic, edaphic ( determined by soil) and socio-economic diversity of the Indian crop-production scene is dotted with many cropping patterns. With a geographic area of 328.76 million hectares, stretching between 8oN and 36oN latitude and between 68oE and 98oE longitude, its altitude varying from the mean sea-level to the highest mountain ranges of the world, India presents a range and diversity of climate, flora and fauna, with a few parallels in the world. The country presents a paradox of containing in it the station with the highest mean annual rainfall in the world (Cherrapunji in Assam ) and also dry, semi-desert area in Rajasthan. The variability of rainfall is most important in all the states, but especially where rainfall is low. In parts of Rajasthan and the Deccan , the variability is more than 100 per cent of the mean. Years of drought account for a frequent a history of crop failures, whereas the years of flood also cause very considerable loss of agricultural production. Temperatures also vary greatly, both geographically and seasonally. Northern and central parts of India in January have temperature comparable with those in Europe in July, though with a greater daily range, but in these places in the pre-monsoon months the maximum temperatures of over 40oC are reached over a large area. Frost may occur in winter in the plains, as far south as a line drawn through Madhya Pradesh and may be heavy in Kashmir and areas north of Punjab .

Socio-economically, the peasantry ranges from the relatively affluent farmers in Punjab, Western UP etc who operate with a high input intensity in agriculture to the subsistent farmers of eastern and central India . They even today, sometimes practice shifting cultivation. Between these two extremes, various intensities of cultivation are practised. The outstanding fact on the socio-economic is the smallness of holdings, the average farm-size in most areas being lower than that is in most tropical countries. Crops production, therefore, presents such an enormous diversity owing to differences in latitude, altitude and variability of rainfall and edaphic diversity.

PHYSIOGRAPHIC CONDITIONS General India is a land of many rivers and mountains. Its geographical area of about 328 M.ha is criss crossed by a large number of small and big rivers, some of them figuring amongst the mighty rivers of the world. The rivers and mountains have great significance in the history of Indian cultural development, religious and spiritual life. A major part (72%) of India ’s population of 1027 millions (2001 census) is rural and agriculturally oriented for whom the rivers, land and climate are the source of their prosperity.

PhysiographyThe classification of the country based on the physiography is one attempt that will help us to understand the division based on the physical characteristics. Physiographically, India may be divided into seven well defined regions. These are: The Northern Mountains , comprising the mighty Himalayan ranges;

II. The Great Plains, traversed by the Indus and Ganga Brahmaputra river systems. As much as one third of this lies in the arid zone of western Rajasthan. The remaining area is mostly fertile plains;

III. The Central Highlands , consisting of a wide belt of hills running east-west starting from Aravalli ranges in the west and terminating in a steep escarpment in the east. The area lies between the Great Plains and the Deccan Plateau; IV. The Peninsular Plateaus comprising the Western Ghats, Eastern Ghats , North Deccan Plateau, South Deccan Plateau and Eastern Plateau; V. The East Coast, a belt of land of about 100- 130 km wide, bordering the Bay of Bengal land lying to the east of the Eastern Ghats ; VI. The West Coast, a narrow belt of land of about 10- 25 km wide, bordering the Arabian Sea and lying to the west of the Western Ghats, and VII. The islands, comprising the coral islands of Lakshadeep in Arabian Sea and Andaman and Nicobar Islands of the Bay of Bengal . ClimateThe presence of the great mountain mass formed by the Himalayas and its spurs on the North and of the ocean on the South are the two major influences operating on the climate of India . The first poses an impenetrable barrier to the influence of cold winds from central Asia , and gives the sub-continent the elements of tropical type of climate. The second, which is the source of cool moisture-laden winds reaching India , gives it the elements of the oceanic type of climate.

India has a very great diversity and variety of climate and an even greater variety of weather conditions. The climate ranges from continental to oceanic, from extremes of heat to extremes of cold, from extreme aridity and negligible rainfall to excessive humidity and torrential rainfall. It is, therefore, necessary to avoid any generalization as to the prevalence of any particular kind of climate, not only over the country as a whole but over major areas in it. The climatic condition influences to a great extent the water resources utilisation of the country.

RainfallRainfall in India is dependent in differing degrees on the South-West and North-East monsoons, on shallow cyclonic depressions and disturbances and on violent local storms which form regions where cool humid winds the sea meet hot dry winds from the land and occasionally reach cyclonic dimension. Most of the rainfall in India takes place under the influence of South West monsoon between June to September except in Tamil Nadu where it is under the influence of North-East monsoon during October and November. The rainfall in India shows great variations, unequal seasonal distribution, still more unequal geographical distribution and the frequent departures from the normal. It generally exceeds 1000 mm in areas to the East of Longitude 78 degree E. It extends to 2500 mm along almost the entire West Coast and Western Ghats and over most of Assam and Sub-Himalayan West Bengal. On the West of the line joining Porbandar to Delhi and thence to Ferozpur the rainfall diminishes rapidly from 500 mm to less than 150 mm in the extreme west. The Peninsular has large areas of rainfall less than 600 mm with pockets of even 500 mm . TemperatureThe variations in temperature are also marked over the Indian sub-continent. During the winter seasons from November to February, due to the effect of continental winds over most of the country, the temperature decreases from South to North. The mean maximum temperature during the coldest months of December and January varies from 29 degree centigrade in some part of the peninsula to about 18 degree centigrade in the North, whereas the mean minimum varies from about 24 degree centigrade in the extreme South to below 5 degree centigrade in the North. From March to May is usually a period of continuous and rapid rise of temperature. The highest temperature occurs in North India , particularly in the desert regions of the North-West where the maximum may exceed 48 degree centigrade. With the advent of South West Monsoon in June, there is a rapid fall in the maximum temperature in the central portions of the country. The temperature is almost uniform over the area covering two thirds of the country which gets good rain. In August, there is a marked fall in temperature when the monsoon retreat from North Indian in September. In North-West India , in the month of November, the mean maximum temperature is below 38 degree centigrade and the mean minimum below 10 degree centigrade. In the extreme North, temperature drops below freezing point.EvaporationEvaporation rates closely follow the climatic seasons, and reach their peak in the summer moths of April and May and the central areas of the country display the highest evaporation rates during this period. With the onset of monsoon, there is a marked fall in the rate of evaporation. The annual potential evaporation ranges between 150 to 250 cm over most parts of the country. Monthly potential evaporation over the Peninsula increases from 15 cm in December to 40 cm in May. In the North-East, it varies from 6 cm in December to 20 cm in May. It rises to 40 cm in June in West Rajasthan . After the onset of monsoon potential evaporation decreases generally all over the country.

Rivers

India is blessed with many rivers. As many as 12 of them are classified as major rivers whose total catchment area is 252.8 million hectare (M.ha). Of the major rivers, the Ganga - Brahmaputra Meghana system is the biggest with catchment area of about 110 M .ha which is more than 43 percent of the catchment area of all the major rivers in the country. The other major rivers with catchment area more than 10 M .ha are Indus ( 32.1 M .ha.), Guava ( 31.3 M .ha.), Krishna , ( 25.9 M .ha.) and Maharani ( 14.2 M .ha). The catchment area of medium rivers is about 25 M .ha and Subernarekha with 1.9 M .ha. catchment area is the largest river among the medium rivers in the country.

Water Bodies

Inland Water resources of the country are classified as rivers and canals; reservoirs; tanks & ponds; beels, oxbow lakes, derelict water; and brackish water. Other than rivers and canals, total water bodies cover all area of about 7 M .ha. Of the rivers and canals, Uttar Pradesh occupies the First place with the total length of rivers and canals as 31.2 thousand km, which is about 17 percent of the total length of rivers and canals in the country. Other states following Uttar Pradesh are Jammu & Kashmir and Madhya Pradesh. Among the remaining forms of the inland water resources, tanks and ponds have maximum area ( 2.9 M .ha.) followed by reservoirs ( 2.1 M .ha.).

Most of the area under tanks and ponds lies in Southern States of Andhra Pradesh, Karnataka and Tamil Nadu. These states along with West Bengal , Rajasthan and Uttar Pradesh, account for 62 percent of total area under tanks and ponds in the country. As far as reservoirs are concerned, major states like Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra , Orissa, Rajasthan and Uttar Pradesh account for larger portion of area under reservoirs. More than 77 percent of area under beels, oxbow, lakes and derelict water lies in the states of Orissa, Uttar Pradesh and Assam . Orissa ranks first as regards the total area of brackish water and is followed by Gujarat, Kerala and West Bengal . The total area of inland water resources is, thus, unevenly distributed over the country with five states namely Orissa, Andhra Pradesh, Gujarat, Karnataka and West Bengal accounting for more than half of the country's inland water bodies.

Surface Water Resources

The annual precipitation including snowfall, which is the main source of the water in the country is estimated to be of the order of 4000 cu.km. The Country has been divided into 35 meteorological sub-division based on rainfall s. The Resources potential of the country, which occurs as natural run off in the rivers is about 1869 cu.km. as per the basin wise latest estimates of Central Water Commission, considering both surface and ground water as one system. Ganga-Brahmaputra-Meghna system is the major contributor to total water resources potential of the country. Its share is about 60 percent in total water resources potential of the various rivers. Based on 199l census, the per capita availability of water works out to 220 cubic metre cu.m.). Due to various constraints of topography, uneven distribution of resource over space and time, it has been estimated that only about 1122 cu.km. of total potential of 1869 cu.km. can be put to beneficial use, 690 cu. km. being due to surface water resources. Again about 40 percent of uitlisable surface water resources are presently in Ganga-Brhamputra-Meghna system. In majority of river basins, present utilisation is significantly high and is in the range of 50 percent to 95 percent of utilisable surface resources. But in the rivers such as Narmada and Mahanadi percentage utilisation is quite low. The corresponding values for these basins are 23 percent and 34 percent respectively.

The distribution of water resources potential in the country shows that as against the national per capita annual availability of water as 2208 cu. m . the average availability in Brahmaputra and Barak is as high as 16589 cu m. while it is as low as 360 cu.m. in Sabarmati basin. Brahmaputra and Barak basin with 7.3 percent of geographical area and 4.2 percent of population of the country has 31 percent of the annual water resources. Per capita annual availability for rest of the country excluding Brahmaputra and Barak basin works out to about 1583 cu.m. Any situation of availability of less than 1000 cu. m . per capita is considered by international agencies as scarcity conditions. Cauvery, Pennar, Sabarmati, East flowing rivers and West flowing rivers are some of the basins which fall into this category.

Agro-climatic Zones

The Planning Commission after examining the earlier studies at the regionalisation of the agricultural economy has recommended that agricultural planning be done on the basis of agro climatic regions. For resource development, the country has been broadly divided into fifteen agricultural regions based on agro climatic features, particularly soil type, climate including temperature and rainfall and its variation and water resources availability as under:

I. Western Himalayan division

II. Eastern Himalayan division

III. Lower Gangetic plain region

IV. Middle Gangetic plain region

V. Upper Gangetic plain region

VI. Trans-Gangetic plain region

VII. Eastern plateau and hill region

VIII. Central plateau and hill region

IX. Western plateau and hill region

X. Southern plateau and hill region

XI. East coast plain and hill region

XII. West coast plain and hill region

XIII. Gujarat plain and hill region

XIV. Western plain and hill region

XV. Island region.

AGRO -ECOLOGICAL REGIONS OF INDIA

Another classification that is relevant in understanding the cropping patterns and agricultural practices of the country is that based on the ecological features of different regions. This classification also takes into account the period for which crops can be grown naturally in the region. The classification is given below:

While the agro climatic zones as described above have been used for macro planning, another attempt to closely look at cropping patterns with emerging changes in the cropping patterns was made based on three decisive parameters, viz. Net Sown Area (NSA), Land Available for Cultivation (LAC) and Net Irrigated Area (NIA) in the region[1]. The various state regions were delineated into different Typologies by taking into consideration the above parameters. It may be appreciated that the develop0ment strategies for agriculture shall depend on availability of land resources of varying types which is indicated by the LAC, the status of water and or moisture availability which in turn points to the potential productivity and growth as indicated by the NIA and the existing level of cultivation which is the NSA.

Various typologies emerge on examination of above parameters. The details of the classification based on the typologies of resource use by state regions is given in table below:

Typology Region

Type

State Regions

A

Mountainous

All Regions of Assam and Other Eastern States, Himachal Pradesh, and Western U.P Hills ( Uttranchal).

North and South Coastal Andhra, Telangana, Bihar Plains, North Gujarat, Plains of Haryana, and Punjab, North Rajasthan, Coastal, Delta, Kanyakumari and Central Plains of Tamilnadu, NW U.P. Plains, Barind and Rarh Plains and Alluvial Plains of W. Bengal

E

Plains – Arid/

Semi Arid

Rayalaseema and Southern Telangana, South and Middle Gujarat, and Saurashtra, Northern and Central Plains of Karnataka, Chhatisgadh (MP), Central Plains of Maharashtra, Southern and Northern Arid Rajasthan Dharmapuri-Salem of Tamil Nadu, Eastern, Central and Western UPPlains and Coastal Plains of W. Bengal,

F

Coastal

Coastal Andhra, Kerala, Orissa and Delta of Tamil Nadu

Analysis of Typologies. These typologies and issues related with development of these regions are as follows.

Typology A

Mountainous covering Himalayan states in the Western and Eastern plains. High altitudes and slopes, large forests areas, perennial rivers leading to floods, soil erosion, silting up of down stream rivers. Inadequate roads and communication infrastructure and Jhum cultivation resulting in soil erosion are characteristics of this typology. Paddy dominated crop System.

Main issues are use of land according to slopes, soil erosion control, forest protection, and infrastructure building.

Typology B Hilly covering central, Southern and Eastern regions with high rainfall (> 1000 mm ), severe runoff, different quality forests and cereals based cropping due to shallow to medium soils. Under developed infrastructure of roads and markets.

Arresting of runoff, water harvesting, soil conservation, fodder and livestock development and logistic support for marketing are the main issues of growth.

Typology C Plateaus covering plateau and hills regions of Bihar , MP ( Vindhya, Satpura and Malwa), Orissa north, and hills of Rajasthan, normally having high rainfall with hill mounds and valleys interspersed with rivers and nallahs having surface runoff. Tanks form significant source of irrigation. Coarse cereals and pulses dominate cropping. Infrastructure for supplies and logistics is poor.

Main issues are control of runoff erosion, strengthening of tank irrigation, wasteland development covering fruits, fodder and fuel, and improvement of communication support.

Typology D

Plains-Irrigated represents the most important crop production area. Irrigation by Gangetic network and peninsular rivers in the South supplemented with tube-wells and shallow wells to fertile alluvial soils giving rise to extensive cultivation of paddy and wheat as well as high value crops like sugarcane are the main features. The infrastructure of marketing and transport is well developed and urbanization is higher (urban population 22%) compared to other types. Productivity levels of crops is quite high.

Reclamation of problem soils, water management through conjunctive use of canal and ground water, are the major issues.

Typology EPlains-Arid/semi-arid covers areas of Central AP, Saurashtra and middle and north Gujarat, North and Central Karnataka, Central plains of Maharashtra, Southern and North arid Rajasthan, UP plains and Dharmapuri -Salem of Tamil Nadu having rainfall around 800 mm . Low land productivity and poor soil fertility giving rise to low value cereals based cropping are characteristics of the regions of this type.

The major development issues are lack of long-term investment is land and water resources, horticulture, livestock and fodder.

Typology F Coastal represents regions of East and West Coasts covering coastal AP,

Kerala, Orissa and delta of Tamilnadu usually having high irrigation. Rice and horticultural crops dominate along with large fishery activity.

Development of infrastructure for fish processing, packaging and export, and distribution of fish seed and training of personnel in production and management of brackish water aquaculture are the prime issues of development.

Strategies

Development of state regions varies in their context of location specific problems and with resource base of the regions. Other activities of crops, livestock, forests,

fodder, horticulture, and fishery are compliments to or dependent on the pace of resource development, particularly, if land and water problems of land use and management, across the typologies do differ with the complexion of resource endowment and the con-committal investment needs. One has to list the strategies and involvement pattern, evaluate with reference to short and long tern prospects of and their development linkages, and prioritize the strategies. This would be task of regional planning bodies under the auspices of Panchayat Raj Institutions. Note, however, they are bound to be necessarily fine tuned in consonance with the problem focus and decision environs. The strategies could be broadly classified as follows:

1. Land development and management is basically meant to alter the land characteristics in order to render resource utilization productive, viable and sustainable. The component strategies include development of wastelands, reclamation of problem soils such as usar, diara. khar. chaur. saline, alkaline and sodic soils, management of farming along slopes in hilly regions and soil conservation. One has to refer to these strategies on the regional context.

2. Water resource development and management handles issues of water resource development as a productive infrastructure in terms of river dams. tanks and tube-wells for which large investment is necessary, management is related to on-farm and in system water management effecting maximum efficiency in water distribution and delivery duly recognizing the need for maximum conservation and fair degree of equity. This could be a complement to the strategy.

3. Integrated watershed development mainly for the rainfed lands in medium to high rainfall regions. The components are soil conservation, water harvesting, designing suitable farming systems of integrated crop, livestock, horticulture and forestry activities. They vary in their importance with the needs of resources of regions. Infrastructural development for long-term investment, employment and income during the gestation period and assets structure are prerequisites for sustainable development. The degree of integration and its pattern depends much on policy intervention and participatory development.

4. Crops and crop development is based primarily on crop research and improvement through genetic engineering and biotechnology besides the traditional approaches in plant breeding and crop selection responsive to various stresses of moisture, biotics and environment. There is another dimension of crop choice and substitution to suit the resource pattern for optimum crop mix, choice of high value crops of horticulture and floriculture, the growing export needs of trade, and with focus on productivity and environment.

5. Horticultural development involves large investment in horticultural crops of export importance such as fruits and spices, flowers and orchids, high value vegetables, coffee and tea plantations in new areas of developed land resources. There are issues of crop complementarity, and substitution under irrigated cropping systems, crop introduction, establishment and management in rainfed areas and watersheds. Plant improvement, biotechnology and nursery management, large waiting periods, financing development are the areas of focus for R & D and information support as well.

6. Livestock development becomes significant in relation to income elastic demand for livestock products such as dairy, poultry and meat and domestic market has huge potentials. The pattern of livestock development depends upon crops and the complementarities with fodder availability and development, and in scope for trade. The components are determined on the basis of land and water resources and the pattern of their utilization. Management focus warrants for R & D on animal breeding, animal nutrition and feeding, and animal health care, and institutional support for effective introduction and organization of activities.

7. Fisheries development is confined to inland fisheries- both freshwater and brackish water aquaculture, in the state regions. Marine fisheries are excluded by choice in our concern for development. The vast stretches of water bodies spread over riverine and coastal areas provide opportunities. Reclamation of derelict water bodies along river courses and tanks improvement offer scope for development of inland fisheries. There are certain environmental and social issues emerging which must be addressed. Establishment of hatcheries, distribution of seeds and information about fishery management, production and marketing and technology transmission are the operational issues for detailed study and policy formulation.

8. Farming system is a composite intervention package of all strategies discussed so far. Its uniqueness for special emphasis lies in its distinctive focus on optimization of the land use and water resource, with respect to income or employment or both. A high level management orientation and institutional support is involved. There are two variations in the approach, One is based on an activity which is the major around which complementary activities are specified. Paddy based farming system of paddy crops, ducks and fishes, and dairy based farming system of cows, fodder, feed grains and vegetables, are some of the examples. Another is resource based and depending upon demand and prices for products, supply responds in a mix of crop and non-crop activities, with no constraints on activity mix, It manifests in as a long run solution of growth and development of the regions. There can be options for farming systems choice for decisions in response to preference functions of farm family households, Intensive R&D is required.

9. Forest development has three dimensions of protecting and qualitative upgradation of existing forests; establishment of new forest cover to widen the base of forestry of regions; and introduction of forest components as silvipasture or agro and/or social forests. Regional needs would determine the components of forest development strategies.

10. Infrastructure development could be grouped under three categories which are (i) commodity improvement and value addition such as processing, packaging and storage, (ii) supportive road and communication services, and (iii) facilitating information and inputs delivery system, including finance and trade. Infrastructure supports all the nine strategies specified above in varying.

The analysis of the strategies for agricultural development based on the typology of the State Regions has special significance from the point of view of financial commitments and the inter departmental cooperation that is required at the State and district levels. This understanding, therefore has special significance for the banking community as well as other development functionaries.

Risk and uncertainty are inescapable factors in agriculture. Farmers face production risk from the weather, pests, diseases and natural calamities, which affect the yield of crops directly. They also face price or market risks, where adverse movements in market price of commodities produced by them causes unforeseen losses irrespective of the level of yield. Other risks such as institutional and personal or human risks also impact farmers' productivity and profitability. All of these risks must be properly managed to achieve satisfactory management in agriculture.

Farmers face risks that are specific to individuals as well as common to a large group (systemic risks). Personal insurance often offers protection against individual risks. Farmers also adopt on their own many risk-alleviation mechanisms, both preventive and curative. The former include measures to reduce income variation such as inter-cropping, drought resistant crops, and contractual share cropping, while the latter are mainly strategies to cope with losses incurred, such as selling stored produce, liquidating assets, participating in labour market, etc. Crop insurance provides farmers some protection against systemic risks associated with crop loss. Other forms of insurance such as weather/ rainfall insurance are also being adopted to address the production risks in agriculture with varying degrees of success.

Market price fluctuations are the other major risk factor affecting farmers’ income. Procurement policies and minimum support prices set by the Government provide some protection, but their coverage is limited and their efficacy is often questioned. Contract farming is a private mechanism that could help farmers address the price risk since at least in theory, it provides a guaranteed buy-back of produce at predetermined price and transfers the market risk to the buyers. There are, however, several issues including regulatory issues, which have to be addressed in this regard before contract farming can succeed in any appreciable manner.

As we move into a globally networked market place under the World Trade Organisation, there is a need for alternative approaches to manage the market risk. One of the approaches that is widely advocated and debated about is risk mitigation through the 'futures' market.

In the mid-19th century, central grain markets were established and a central marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (spot trading) or for forward delivery. The latter contracts—forwards contracts—were the forerunners to today's futures contracts. In fact, this concept saved many a farmer the loss of crops and helped stabilize supply and prices in the off-season.

Futures contracts

A futures contract is a type of derivative instrument in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If somebody buys a futures contract, he is basically agreeing to buy something in future at a price which is determined now. But participating in the futures market does not necessarily mean that one will be responsible for receiving or delivering large quantities of physical commodities. Buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than exchange physical goods, which is the primary activity of the cash/ spot market. That is why futures contracts are used as financial instruments not only by producers and consumers, but also by traders and speculators.

The futures market is a centralized marketplace for buyers and sellers who meet and enter into futures contracts. Pricing in the market is based on bids and offers matched electronically. In a typical example, a producer of wheat may be trying to secure a selling price for next season's crop, while a baking farm (bread maker) may be trying to secure a buying price to determine how much bread can be made and at what profit. So the farmer and the bread maker may enter into a futures contract requiring the delivery of 10 metric tons (MT) of wheat to the buyer in June at a price of, say, Rs 700 per quintal. By entering into this futures contract, the farmer and the bread maker secure a price that both parties believe will be a fair price in June. It is this contract - and not the underlying commodity, i.e. wheat - that can then be bought and sold in the futures market.

A futures contract is thus an agreement between two parties: the party who agrees to deliver a commodity (a short position), and the party who agrees to receive a commodity (a long position). In the above example, the farmer would be the holder of the short position (agreeing to sell) while the bread maker would be the holder of the long position (agreeing to buy).

All futures transactions take place through an organized 'exchange', which acts as the common counterparty to the seller and the buyer. The basic difference between a 'forward' contract and a 'futures' contract lies in the existence of this intermediary. While, therefore, forward contracts can be tailor-made to suit the needs of the buyer and seller, in every futures contract, various parameters are specified by the exchange: the quantity and quality of the commodity, the price per unit, and the date and method of delivery. The “price” of a futures contract is represented by the agreed-upon price of the underlying commodity that will be delivered in the future. For example, in the above scenario, the price of the contract is Rs 7,00,000 for 10 MT of wheat at a price of Rs 700 per quintal.

Thus, a futures contract can be formally defined as an agreement between two parties to buy or sell a commodity of a specified quantity and quality at a specific time in future at a specific price through the Exchange.

Settlement of contract

All futures contracts have provision for physical delivery of the underlying commodity. A futures contract is generally known by its month of delivery. Again, by convention, the contract has to be closed or physical delivery made, by the 20th of the month to which it relates. For example, if the contract matures in August, the delivery is to be made by the 20th of August. However, in reality, only about 1 per cent of the futures contracts are settled through actual physical delivery. If a person intends to make or take delivery of the commodity, he has to notify the exchange before the 'tender period' during which the exchange will make arrangements to contact the counterparty and take care of the logistics for physical delivery at a specified warehouse.

The profits and losses arising out of a futures contract depend on the daily movements of the market for that contract and is calculated on a daily basis by the Exchange. For example, let us say the futures contracts for wheat increases to Rs 710 per quintal the day after the above farmer and bread maker enter into their futures contract at Rs 700 per quintal. The farmer, as the holder of the short position, has lost Rs 10 per quintal because the selling price just increased from the future price at which he is obliged to sell his wheat. The bread maker, as the long position holder, has profited by Rs 10 per quintal because the price he is obliged to pay is less than what the rest of the market is going to pay for wheat.

On the day the change occurs, the farmer's account with the exchange is debited by Rs 10,000 (Rs 10 per quintal X 10 MT) and the bread maker's account is credited by Rs 10,000. As the market moves every day, these kinds of adjustments are made accordingly. Thus, unlike the stock market, futures positions are settled on a daily basis ('marked to the market' every day at the closing price), which means that gains and losses from a day's trading are deducted or credited to a person's account each day. In contrast, in the stock market the capital gains or losses from movements in price are not realized until the investor decides to sell the stock or cover his or her short position.

As the accounts of the parties in futures contracts are adjusted every day, most transactions in the futures market are settled in cash, and the actual physical commodity is bought or sold in the cash/ spot market. Prices in the cash and futures market tend to move parallel to one another, and when a futures contract expires, these two prices merge into one. The contract will be settled on the date either party decides to close out their futures position. In the above example, if the contract was settled at Rs 710 per quintal, the farmer would lose Rs 10,000 on the futures contract and the bread maker would have made Rs 10,000 on the contact.

But after the settlement of the futures contract, the bread maker still needs wheat to make bread, so he will in actuality buy his wheat in the cash/ spot market at Rs 710 per quintal (a total of Rs 7,10,000) because that's the price of wheat in the cash/ spot market when he closes out his contract. Technically, the bread maker's futures profits of Rs 10,000 go towards his purchase, which means he still pays his locked-in price of Rs 700 per quintal (Rs 7,10,000 – Rs 10,000 = Rs 7,00,000). The farmer, after also closing out the contract simultaneously, can sell his wheat in the cash/ spot market at Rs 710 per quintal. But, because of his losses from the futures contract with the bread maker, the farmer still actually receives only Rs 700 per quintal. In other words, the farmer's loss in the futures contract is offset by the higher selling price in the cash market, a situation which is referred to as 'hedging'.

It is, therefore, evident that a futures contract is more like a financial position. We can imagine that the two parties in the wheat futures contract discussed above are not a farmer and a bread maker, but two traders or speculators. In such a case, the short speculator would simply have lost Rs 10,000 while the long speculator would have gained that amount. Neither would have to go to the cash market to buy or sell the commodity after the contract expires, as such people do not have any interest in the underlying commodity.

Importance of the Futures Market

Two major functions of the futures market are (i) price discovery and (ii) risk mitigation.

Price discovery

Due to its highly competitive nature, the futures market has become an important economic tool to determine prices, based on the estimated amount of supply and demand. Futures market prices depend on a continuous flow of information from around the world and thus require a high amount of transparency. Factors such as production forecasts, weather, war, debt default, government policy etc. can all have a major effect on supply and demand of a commodity and, hence, impact the present and future price of the commodity. This kind of information and the way people absorb it and respond to it constantly changes the price of a commodity. This process is known as price discovery. It is the collective wisdom of the players in the futures market.

Risk mitigation

In the example of the farmer and bread maker given above, we have seen how the futures market helps to mitigate the price risk. Risks are reduced because the price is pre-set, therefore letting participants know how much they will need to buy or sell.

The players in the market

The players in the futures market broadly fall into two categories: hedgers and speculators.

Hedgers

Farmers, manufacturers, importers and exporters mostly having an interest in the underlying commodity (either as producer/ manufacturer or consumer) can all be hedgers. A hedger buys or sells in the futures market to secure the future price of a commodity intended to be sold or purchased at a later date in the cash/ spot market. This helps to protect him against price risks.

The holders of the long position in future contracts (the buyers of the commodity) are trying to secure as low a price as possible. The short position holders (the sellers of the commodity) will want to secure as high a price as possible. The futures contract, however, provides a definite price for both parties, which reduces the risks associated with price volatility.

Speculators

Other market participants, however, do not aim at minimizing risk, but rather to benefit from the inherently risky nature of the futures market. These are the speculators, and they aim to profit from the very price change that hedgers are protecting themselves against. While hedgers want to minimize their risk, speculators aim at increasing their risk and therefore maximizing their profits.

Unlike the hedger, the speculator does not actually own or seek to own the commodity in question. Rather, he will enter the market seeking profits by offsetting rising and declining prices through the buying and selling of contracts. While speculation is not considered to be one of the economic purposes of futures markets, speculators do help make futures markets function better by providing liquidity, or the ability to buy and sell futures contracts quickly without materially affecting the price. There may not be enough long and short hedgers to create a liquid futures market by themselves. The participation of speculators willing to take the other side of hedgers' trades adds liquidity and makes it easier for hedgers to hedge. However, given their propensity to take risks which may distort the market, this class of players in the market need to be put under appropriate regulatory check.

Characteristics of the Futures Market

Some of the concepts associated with the futures market are as under:

Margin

In the futures market, margin has a definition distinct from its definition in the stock market, where margin denotes the use of borrowed money to purchase securities. In the futures market, margin refers to the initial deposit of 'good faith' made into an account with the exchange in order to enter into a futures contract. This margin is referred to as good faith because it is this money that is used to debit any day-to-day losses.

When one enters into a futures contract, the exchange will state a minimum amount of money that must be deposited with it. This original deposit of money is called the 'initial margin'. When the contract is liquidated, the initial margin will be refunded, plus or minus any gains or losses that occur over the span of the futures contract. In other words, the amount in the margin account changes daily as the market fluctuates in relation to the futures contract. The minimum-level margin is determined by the exchange and is usually a small percentage of the futures contract. Margin is primarily determined by the volatility of the underlying commodity and the present market conditions.

While the 'initial margin' is the minimum amount required to enter into a new futures contract, the 'maintenance margin' is the lowest amount an account must have at all points of time. This is the lowest limit, which the account can reach before needing to be replenished. For example, if the margin account drops to a level below the 'maintenance margin' stipulated by the exchange because of a series of daily losses (marking to market daily), brokers are required to make a 'margin call' and ask the holder of the contract to make an additional deposit into the account to bring the margin back to the 'initial' amount.

When a margin call is made, the funds usually have to be delivered immediately. If they are not, the broker can have the right to liquidate the position completely in order to make up for any losses he may have incurred on behalf of the holder of the contract.

Leverage

In the futures market, leverage refers to having control over large cash amounts of commodities with comparatively small levels of capital investment. In other words, with a relatively small amount of cash (initial deposit into the margin account), one can enter into a futures contract that is worth much more.

Futures positions are highly leveraged because the initial margins that are set by the exchanges are relatively small compared to the cash value of the contracts in question (which is why the futures market is useful but also very risky). The smaller the margin in relation to the cash value of the futures contract, the higher the leverage. Due to leverage, if the price of the futures contract moves up even slightly, the profit will be large in comparison to the initial margin. However, if the price just inches downwards, that same high leverage will yield huge losses in comparison to the initial margin deposit.

Pricing and limits

As mentioned earlier, contracts in the futures market are a result of competitive price discovery. Price movements on futures contracts, however, have a minimum amount established by the futures Exchanges and are known as 'ticks'. For example, the minimum amount by which the price of a quintal of wheat can move upwards or downwards in a day on the NCDEX platform is 20 paise (0.20 Rupee).

The Exchange also specifies a limit on either side within which the futures prices can trade on a daily basis. A typical example is that in the case of wheat traded on the NCDEX platform, the daily price fluctuation limit is (+/-) 4%. If the trade hits the prescribed daily price limit there will be a cooling off period for 30 minutes and trade will be allowed during this cooling off period within the price band. Thereafter, the price band shall be raised by another 50% of the existing limit i.e. (+/-) 2% and trade will be resumed. If the price hits the revised price band again during the day, trade will only be allowed within the revised price band. However, no trading shall be permitted during the day beyond the revised limit of (+/-) 6%.

The Exchange can revise this price limit if it feels it's necessary. It's not uncommon for the exchanges to abolish daily price limits in the month that the contract expires (delivery or 'spot' month). This is because trading is often volatile during this month, as sellers and buyers try to obtain the best price possible before the expiration of the contract.

In order to avoid any unfair advantages, the Forward Markets Commission (FMC) and the futures Exchanges impose limits on the total amount of contracts or units of a commodity in which any single person can invest. These are known as position limits and they ensure that no one person can control the market price for a particular commodity.

Commodity futures trading in India

India has a long tradition of organized trading in commodity derivatives. The history of organized futures trading in India can be traced to the setting up of Bombay Cotton Trade Association in 1875. Futures trading in oilseeds was started with the setting up of Gujarati Vyapari Mandali in 1900 which carried out futures trading in groundnut, castor seed and cotton. Before World War II broke out in 1939, several futures markets in oilseed were functioning in Gujarat and Punjab.

Futures trading in Raw Jute and Jute began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd. in 1919. Later, East Indian Jute Association Ltd. was set up in 1927 for organizing futures trading in Raw Jute. These two associations amalgamated in 1945 to form the East India Jute & Hessian Ltd. to conduct organized trading in both Raw Jute and Jute goods. In case of wheat, futures markets were in existence at several centers at Punjab and U.P., the most notable amongst them being the Chamber of Commerce at Hapur, which was established in 1913. Other markets were located at Amritsar, Moga, Ludhiana, Jalandhar, Fazilka, Dhuri, Barnala and Bhatinda in Punjab and Muzaffarnagar, Chandausi, Meerut, Saharanpur, Hathras, Ghaziabad and Bareilly in U.P.

Futures markets in Bullion began in Mumbai in 1920 and later similar markets came up at Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Calcutta. In due course, several other exchanges were also established in the country to trade in such diverse commodities as pepper, turmeric, potato, sugar and gur (jaggery).

On similar lines that the stock market is regulated by the Securities and Exchange Board of India (SEBI), the futures market is regulated by the Forward Markets Commission (FMC) under the Forward Contracts (Regulation) Act, 1952.

In spite of this long history, futures trading in most of the commodities was either suspended or prohibited by the 1970's as it was felt that the futures markets were providing a platform for speculation in these commodities resulting in erratic and uncontrollable price movements. However, with the launching of the financial sector reforms in the early nineties, the Government had a re-look at the role of the futures market, particularly in the context of the need for price risk mitigation in agriculture. On the basis of recommendations made by the Kabra Committee (1994), futures trading was permitted in several commodities. Further, in the wake of national Agricultural Policy announced in July 2000 and following the issue of Government notifications in April, 2003, futures trading was allowed to be conducted in any commodity subject to the approval / recognition of the Forward Markets Commission (FMC). However, trading in 'options' (another class of derivatives in which the seller/ buyer has the right, but not the obligation to sell/ buy) is still prohibited in India in the case of commodities.

Following the Government initiatives in 2003, three national level multi-commodity exchanges were established to facilitate futures trading in commodities. These are: (i) National Commodity and Derivative Exchange of India (NCDEX), Mumbai, (ii) Multi Commodity Exchange of India (MCX), Mumbai and National Multi-Commodity Exchange of India (NMCE), Ahmedabad. Together, they account for over 90 per cent of the trade in commodity futures in the country.

At present, futures trading is going on in about 90 commodities in the three national exchanges and 21 regional commodity-specific exchanges. The top five commodities traded in the futures market in 2005-06 were gold, silver, guar seeds, channa and urad. Wheat and soyabean oil also attracted considerable interest and there was significant growth in the trading volumes of other commodities too.

Futures trading in India - Issues

Futures trading in India has considerably expanded since the multi-commodity exchanges were set up. However, there are certain issues which need to be addressed, if futures trading can position itself as a major risk mitigating tool for the agriculture sector in the country.

Indian agriculture is characterised by predominance of small and marginal farmers. While perhaps large farmers can take the advantage of the opportunities made available by commodities futures trading, it will be difficult for small and marginal farmers to benefit from this or use this for mitigating price risk. A small farmer will not be able to meet the minimum lot size or the initial margin requirements of the exchange for trading in futures. Nor does he have the awareness and knowledge required for the purpose. In this scenario, some sort of 'aggregation' of the produces of small and marginal farmers will be necessary. This aggregation can be done by some suitable intermediary organization such as farmers' cooperatives, companies or similar such associations. Although banks are ideally placed to act as aggregators, they are prohibited under the Banking Regulation Act, 1949 (Section 8) from engaging in trading of commodities.

Recently, a working group appointed by Reserve Bank of India (RBI) has examined this aspect and has recommended that the Central Government may consider issuing a notification under Section 6(1)(o) of the Banking Regulation Act, 1949 permitting banks to deal in the business of agricultural commodities including derivatives. The group has observed that once such a notification is issued, there will be no need for any specific amendment to Section 8 of the Act. Once this happens, banks can also participate in futures trading in commodities. The recommendation of the group is under consideration of the Government of India.

Several studies have observed that for further growth in agricultural finance to take place, there is a need to shift from the present input-based financing patterns of agricultural credit to output based finance, which are more aligned to the market and establish linkages between production and marketing by increasing pledge finance, credit for marketing of agricultural produce and introduction of advances against warehouse receipts.

Warehouse Receipts

Although at present banks do provide finance to farmers against warehouse receipts, the system is handicapped by a lack of proper standardization of warehouses and the warehouse receipts not being negotiable instruments. Negotiable warehouse receipts are an integral part of the marketing and financial systems of most industrial countries as they can be traded, sold, swapped and used as collateral to support borrowing or accepted for delivery against a derivative instrument such as a futures contract.

The RBI working group has also observed that a well-functioning warehouse receipt system would obviate the need for Governments to take physical inventories to support prices as they could simply purchase warehouse receipts when the prices fall below a certain minimum and that the Governments also need not hold physical stocks for ensuring food security; they could simply hold warehouse receipts.

However, all this needs an appropriate legal, regulatory and institutional environment to support the warehouse receipt system. The Warehouse Development and Regulation Bill introduced recently in the Parliament has provisions for establishment of an 'accrediting authority' for warehouses and also for making the warehouse receipts negotiable instruments. It is expected that when the Bill cones into force, there will arise great opportunities for banks to finance this sector, both in the short term as well as in the medium/ ling term.

Pending the creation of such an environment by the Government, the national level Multi-Commodity Exchanges have embarked on setting up of accredited warehouses on their own at various locations, meeting the quality standards prescribed by them in connection with futures trading. Collateral management companies (subsidiaries) have also been set up by the exchanges (NCDEX and MCX) to facilitate management of the warehouses and the commodities stored therein.

Farming is an age-old means of livelihood for millions of Indians. However, there have been few systems in which farmers are assured of a market for their produce, leave alone a remunerative price. Farmers have on occasion had to throw away their produce for want of buyers. While this is one side of the coin, on the other is the agri-­based and food industry, which requires timely and adequate input of quality agricultural produce. This underlying paradox of the Indian agricultural scenario has given birth to the concept of Contract Farming, which promises to provide a proper linkage between the 'farm and market.'

Recognising the need for and merits of such a linkage with the farming community, several corporates involved in agro-commodity trading, processing, exports, etc. have attempted to establish systems and models that ensure timely and consistent supply of raw material of the desired quality at reasonable cost.

Contract Farming is defined as a system of production and supply of agricultural/horticultural produce under forward contracts between producers/ suppliers and buyers. The essence of such an arrangement is the commitment of the producer to provide an agricultural commodity of a certain type, at a time and a price, and in a quantity required by a known and committed buyer.

Contract farming usually involves the following basic elements-pre-agreed price, quality quantity. According to the contract, the farmer is required to plant the contractor's crop on his land, and to harvest and deliver to the contractor a quantum of produce, based upon anticipated yield. This could be at a pre-agreed price. Towards these ends, the contractor supplies the farmer with selected inputs, including the required technical advice. Thus, the contractor supplies all the inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the contract differ according to variations in the nature of crop grown, agencies, farmer, and technologies and the context in which they are practised.

For example, contract farming in wheat is being practised in Madhya Pradesh by Hindustan Lever Ltd (HLL), Rallis and ICICI Bank. Under the system, Rallis supplies agri-inputs and know-how, and ICICI Bank provides farm credit to the farmers. HLL, the processing company, which requires the farm produce as raw material for its food processing industry, provides the buyback arrangement for the farm output. In this arrangement, farmers benefit through an assured market for their produce in addition to timely, adequate and quality input supply including free technical know-how; benefits through supply-chain efficiency; while Rallis and ICICI Bank benefits through assured clientele for their products and services. The consortium is also planning to rope in other specialist partners including insurance, equipment and storage companies.

PepsiCo Foods Ltd.

Launching its agro-business in India with special focus on exports of value-added processed foods, Pepsi Foods Ltd. (PepsiCo) entered India in 1989 by installing a Rs. 22 crore state-of-the -art tomato processing plant at Zahura in Hoshiarpur district of Punjab. The company intended to produce aseptically packed pastes and purees for the international market. However, before long, the company realized that investment in agro-processing plants would not be viable unless the yield and quality of agricultural produce to be processed were up to international standards. At that point of time, tomato had never been cultivated in Punjab for its solid content, with a focus on high yields and other desirable processing such as colour, viscosity and water binding properties. There were no logistically efficient procurement models for fruits and vegetables that could be built on by the company. These apart, there was simply not enough quantity of tomato available even if the grown varieties/hybrids were procured from the open market. The total Punjab tomato crop was 28000 tons, available over a 25-28 day period, while PepsiCo required at least 40000 tons of tomato to operate its factory, which had a gigantic capacity of 39 tons fresh fruit per hour. The company required this intake over a minimum 55-day time frame, and in 1989, the season in Punjab did not last beyond 28­ days. Skeptics expressed doubts over the feasibility of the Zahura tomato processing plant, and had said that it would remain a museum piece! There were formidable challenges before the company and nothing short of a horticultural revolution was required to solve the problem. There was no choice but to alter the tomato production and logistics situation in Punjab. This led the birth of PepsiCo's backward linkage with farmers of Punjab.

PepsiCo follows a contract farming method, where the grower plants the company's crops on his land and the company provides selected inputs like seeds/saplings, agricultural practices, and regular inspection of the crop and advisory services on crop management. The PepsiCo model of contract farming, measured in terms of new options for farmers, productivity increases, and the introduction of modern technology, has been an unparalleled success. The company focused on developing region and desired produce specific research, and extensive extension services. It was thus successful in bringing about a drastic change in the Punjab farmer's production system towards its objective of ensuring supply of right produce at the right time in required quantities to its processing plant. Another important factor in PepsiCo's success is the strategic partnership of the company with local bodies like the Punjab Agricultural University (PAU) and Punjab Agro Industries Corporation Ltd. (PAIC). Right from the beginning, PepsiCo knew that changing the mindset and winning the confidence of farmers would not be an easy task for outsiders. The company's unique partnership with PAU and PAIC fuelled its growth in Punjab.

Encouraged by the sweeping success of contract farming in tomato in several districts of Punjab, PepsiCo has been successfully emulating the model in food grains (Basmati rice), spices (chilies) and oilseeds (groundnut) as well as vegetable crops like potato.

The company, which had been involved in the export of Basmati rice since 1990, was the first processor in India to invest and strengthen backward linkages for Basmati rice. After extensive multi-locational field trials, PepsiCo ventured into contract farming in Basmati rice. The company invested over Rs.5 crore in a modern processing plant at Sonepat in Punjab. It is involved right from the stage of selecting varieties of Basmati (based on customer preference), seed multiplication and development of a package of practices for farmers. PepsiCo's scientists, who ensure successful transfer of technology from the trial to the commercial field levels, closely monitor the performance of the crop.

At the time of harvest, the company procures the entire pre-agreed quantum of the harvested produce at the farm gates, at pre-agreed price. The raw material so procured is transferred to PepsiCo's ISO 9002 and Hazard Analysis Critical Control Point (HACCP) certified Rice Mill located at Sonepat for processing, packing and export, ensuring that the product remains completely traceable from field to consumers. Farmers from Jalandhar, Amritsar, Hoshiarpur and Sangrur districts of Punjab, and parts of Western Uttar Pradesh have been contracted for Basmati rice cultivation. Contracted farmers have reaped yields of 2.5 tons/hectare. The company plans to increase the acreage under Basmati rice to 4000 hectares to meet the complete requirement of its manufacturing plant.

Similarly, PepsiCo planned a foray into contract farming in groundnut with the farmers of Punjab with the objective of producing export-quality, value-added groundnut such as roasted and salted peanuts, flavoured and coated peanuts, and peanut butter. Using plastic mulch groundnut (PMG) technology sourced from China, the company has demonstrated yields of 3.0 and 4.0 tons per hectare in field trials, much above the national average of 1.0 ton/ha. The company proposes to extend its contract farming in groundnut to farmers in Rajasthan and Uttar Pradesh, who have shown great interest.

A sound R&D programme backed by committed extension personnel to transfer the resulting technologies has been the intrinsic strength of PepsiCo. Its focused research on increasing yield levels, to the advantage of farmers (which in turn brings down the cost of raw material to the company) has resulted in their increased trust and loyalty towards the company. Post PepsiCo entry has seen the tripling of yield levels in chili (from 6.0 tons/ha to 20 tons/ha) and tomato (14-16 tons/ha to 52 tons/ha).

With this kind of a backward linkage with farmers of Punjab and Haryana, PepsiCo developed a perfect contract farming model involving an enduring relationship with local agencies including the State Government.

Key elements of PepsiCo success

Core R&D team

Unique partnership with local agencies including a public sector enterprise

Prompt dispatch/delivery/procurement of the mature produce from every individual contracted farmer through the system of 'Quota Slips'

Effective use of modern communication technology for communication with field executives

Regular and timely payment to contracted farmers through computerized receipts and transparent system

Maintenance of perfect logistics system and global marketing standards.

Appachi Cotton Company (ACC)

the ginning and trading house from Pollachi (Coimbatore district of Tamil Nadu) hit the headlines in May 2002 for the street play it employed to encourage farmers in the Kinathukadavu block of Coimbatore to sow cotton seeds in their fields. The singer in the street play assured cotton framers that, unlike in the past, they would not be disappointed if they cultivated cotton in their fields, as they would be backed by a model called Integrated Cotton Cultivation (ICC), which would guarantee a market supportive mechanism for selling their produce.

ACC caters to top-bracket, quality-conscious clients from the textile industry in India and abroad, and their client specific operation has won them laurels. ACC is the only private ginner in the country to have successfully entered backward and forward integration between the 'grower' (farmer) and the 'consumer' (textile units). Well in advance of the 2002 kharif sowing season, ACC undertook the Herculean task of integrating about 600 farmers belonging to various districts of Tamil Nadu on a holistic plank. This was done at a time when failure of monsoon for the third consecutive year was imminent. This led to the farmer's perceiving the ICC programme as a boon, as their traditional source of finance and support had refused further funds due to non-recovery of earlier loans.

The Appachi formula ensured that its farmer members never went short of money and material during the crucial 100 days of the crop cycle. The contract assured the farmers easy availability of quality seeds, farm finance at an interest rate of 12% per annum, door delivery of unadulterated fertilizers and pesticides at discounted rates, expert advice and field supervision every alternate week, and a unique selling option through a MoU with the coordinating agency (ACC).

The core principle of the formula lies in the formation of farmers' Self-Help Groups (SHGs). Each farmer belonging to a SHG is sanctioned Rs. 8000/per acre as crop loan @ 12% p.a. interest. Disbursement of this amount is strictly need-based. Allocation and disbursement is at the behest of the coordinating agency. Hence all requests are scrutinised, evaluated, authenticated, and only then recommended to the lending bank. All the participating farmers are asked to issue Post Dated Cheques for the loan they avail. Hence, the moral responsibility of fulfilling the bank's obligation squarely lies on the participating farmer.

The Appachi formula differs significantly from other existing contract farming models on its 'pricing' front in that no prior price fixing is done in this model. As cotton is a commodity prone to price fluctuations due to domestic and international market forces, ACC did not wish to create a climate of uncertainty due to pre­fixed prices with the contracting farmers. The unique and transparent MoU of ACC allows the farmer to sell his commodity at the market prices prevailing during the time of negotiating. The Co-ordinating agency has the first right to negotiate, but in the event of disagreement about price during negotiation, the farmer groups can call for a tender/auction to sell the accumulated cotton. The MoU clearly stipulates conditions to be followed in case of open tender/auction, and allows the coordinating agency to participate in the proceedings.

The formula has built checks and balances into the system for early identification of trouble making farmers or willful defaulters and their elimination at an early stage to protect the interest of the group, the bank and the coordinating agency. This is the first time ever that a cotton farmer in India has been forwardly integrated to the consumer textile industry. By integrating backward and forward with the producing and the consuming communities, ACC has attempted to address all the existing maladies of the cotton supply chain. According to a leading ginner, who spearheaded the unique supply chain model, such a system is 'the need of the hour' not for the 'growth' of textile industry in India but for its 'very survival' given the imminent hardships and emerging challenges arising out of the perils of WTO (World Trade Organisation).

The Appachi formula of contract farming has been so successful that the Tamil Nadu Government is now interested in replicating this formula in various cotton-growing districts of the State.

Ugar Sugar's experience with barely

The story of the Belgaum (Karnataka) based Ugar Sugar Works Ltd., which established a successful backward linkage with farmers of Northern Karnataka for supply of barley for its malt unit is quite interesting and insightful. Farmers surrounding Ugar Sugar in Belgaum, who had been cultivating sugar under intensive irrigation found themselves with the problem of salinity in soils. Ugar Sugar took this opportunity to begin creating awareness among the farming community about alternative crops suitable for saline soils. Of these, barley was known to give economic yields of good quality in saline soils. The company assured the farmers of a market for their produce if they agreed to grow barley, as well as the required technical and input support.

All this happened way back in 1997, when the company required 5000 tons of barley annually for its malt unit. At that point of time, barley was cultivated on a commercial scale only in North India, which meant huge transportation cost for the company. Furthermore, such lots carried a mixture of feed and malt grade barley, which meant no surety of consistent quality raw material. The company had no land of its own to start barley production near its malt plant. This led to the birth of Ugar Sugar's unique contract farming system for barley production.

After intensive research and field testing of over 800 varieties of barely, the company supplied UBE425 variety of barely to its 470 contracted farmers, who mostly owned between 2-5 acres land, were within a radius of 40 kilometre from the company's malt plant, and had resources enough to irrigate the crop at least twice during the crop cycle. The contract farming system helped Ugar Sugar to get barley with high starch, less protein (<12%) and homogeneity, at the right time, in required quantities, and the most competitive prices.

Key elements of Ugar's contract farming model

· The company supplies genetically pure seed on credit to the contracted farmers without interest.

· The price of barley seeds supplied for sowing and the final produce that is procured by the company is the same i.e. cost of the seed is same as that of the pre-agreed price of barley. Hence, the quantity of seed supplied for sowing is recovered at the time of procurement of the produce.

· A technical person from the company visits the farmer's fields at least four times in a crop cycle, giving free technical assistance.

· The company supplies seed at the sowing points in farmers' fields, and the produce is procured from the fields at the company's transportation cost.

· Under the contract, it is obligatory on the part of both the contracting farmer and the company to sell and buy respectively the entire contracted quantity at the pre-agreed price.

The cases discussed here are a few among several such successful ventures by corporates involved in food processing, agro-commodity and food products exports. The demonstrated successes of gherkin exporters of Southern India, which is over 90% based on contract farming, Marico's safflower procurement through a successful backward linkage model, are worth mention.

Bottlenecks and problems

In all the currently working models of contract farming, farmer's participation remains limited to production in the field. The contracting company usually provides seeds, inputs, technology packages and technical guidance through regular supervision. Critics are of the opinion that the results are very promising in early years. Farmers' benefit from improved technology and higher productivity, quality and production. The contract price does not appear to matter much in the early years. Once the farmers are confident of being able to deploy new technology, problems start cropping up. If the market price is more advantageous than the contract price, farmers renege on the contract.

Contract farming models can sustain in the long run only if the initiative/empowerment comes from the farmers rather than the corporate. Another moot point is that in the existing models, farmers are largely 'price takers', while the contracting firm 'makes' the price.

Other criticism leveled against contract farming in India include less generation of employment, labour-saving farm practices, low level of commitment of corporates over rural development, lack of transparency and communication. Enforceability of the agreement and standardisation of contract farming agreements are the major bottlenecks plaguing contract-farming ventures in India.

Conclusion To establish an agrarian economy that ensures food and nutrition security to a population of over a billion, raw material for its expanding industrial base, surplus for export, and a fair and equitable reward system for the farming community, 'commitment driven' contract farming is no doubt a viable alternative farming model, which provides assured and reliable input service to farmers and desired farm produce to the contracting firms. Several Indian and multinational companies have already begun such initiatives in India and have demonstrated success. The successful cases should encourage the rest of the producing and the consuming enterprises to emulate them for mutual benefit in specific and Indian agriculture in general.

Cropping activities go on all the year-round in India, provided water is available for crops. In northern India, there are two distinct seasons, kharif (July to October), and rabi (October to March). Crops grown between March and June are known as zaid. In some parts of the country, there are no such distinct seasons, but there they have their own classification of seasons. The village revenue officials keep plot-wise record of crops grown in each season. These are annually compiled district-wise, state-wise and on all-India basis. From these records one could calculate the relative abundance of a crop or a group of crops in a region. These crops are grown sole or mixed (mixed-cropping), or in a definite sequence (rotational cropping). The land may be occupied by one crop during one season (mono-cropping), or by two crops (double-cropping) which may be grown in a year in sequence. Of late, the trend is even more than two crops (multiple-cropping) in a year. These intensive cropping may be done either in sequence or even there may be relay-cropping-one crop under-sown in a standing crop. With wide-rowed slow growing cropping patterns, companion crops may be grown.

Cropping Patterns

There are various ways of utilising the land intensively. It is proposed to give a synoptic view of cropping patterns prevalent in the country. Before dealing with the cropping patterns, a brief description of the factors that determine the cropping systems of an individual locality or region are briefly presented here.

In any locality, the prevalent cropping systems are the cumulative results of past and present decisions by individuals, communities or governments and their agencies. These decisions are usually based on experience, tradition, expected profit, personal preferences and resources, social and political pressures and so on. Essentially, they are answers to some of the following questions:

· What with the present pest-and-disease control methods are ecologically practicable?

· What interactions occur among the ecologically practicable crops, and the chosen crops and must be combined in a special way (rotations) in the farming systems?

· Are any of the ecologically feasible crops ruled out by infrastructural factors?

· Which of the crops, now remaining on the list, are most profitable (or yield most food in a subsistence agriculture)?. In what combinations and at what level of input application would they make the best use of local land, climate and input resources in short-term and long-term situations bearing in mind the degree of food and income security required by the individual farmer and the community?

· What operational factors rule out or amend the size and the method of any of the economically preferable crop combinations thereof?

· Finally, are the crop combinations, the farming systems and the input levels suggested by this process of the individual farmers compatible with his own skills, enterprise preferences, health, age and capital?

It is clear that there are innumerable micro variations in the cropping patterns, which cannot be described in this note, some broad contours of farming emerge. The most important element of farming in India is the production of grains and the dominant food-chain is grain-man. On this basis, the country may be divided broadly into five agricultural regions.

I. The rice region extending from the eastern part to include a very large part of the north-eastern and the south-eastern India, with another strip along the western coast.

II. The wheat region, occupying most of the northern, western and central India.

III. The millet-sorghum region, comprising Rajasthan, Madhya Pradesh and the Deccan Plateau in the centre of the Indian Peninsula.

IV. The temperate Himalayan region of Kashmir, Himachal Pradesh and Uttar Pradesh and some adjoining areas. Here potatoes are as important as cereal crops (which are mainly maize and rice), and the tree-fruits form a large part of agricultural production.

V. The plantation crops region of Assam and the hills of southern India where good quality tea is produced. There is an important production of high-quality coffee in the hills of the western peninsular India. Rubber is mostly grown in Kerala and parts of Karnataka and Tamil Nadu. There are some large estates, but most of the growers would come under the category of small holders. Sugarcane, which in many countries is a plantation crop, is almost entirely grown by small holders in India.

There had been substantial investments in major irrigation works in the colonial days. The post-Independence era saw many multi-purpose irrigation works. Lately, interest in the medium and minor irrigation works has increased, especially after the drought of 1966. Thus, at present, an all-India irrigation potential of 59 m ha has been created and is expected to increase up 110 m ha by 2025. Irrigation, especially the minor works, has provided a base for multiple-cropping. The All-India Coordinated Crops-Improvement Projects run co-operatively by the Indian Council of Agricultural Research and the agricultural universities have generated short-season, photo-period-insensitive high-yielding varieties of various crops suitable for a high intensity of cropping. The adaptability of these varieties on the farmer's fields has been demonstrated in the National Demonstration Programme spread all over the country. The various developmental and the educative programmes, especially the High Yielding Varieties Programme, have also resulted in newer cropping patterns involving intensive cropping. The area of rice has increased in Punjab and Haryana. Similarly wheat is now grown in West Bengal and to some extent in the southern states of the country.

All these factors have led to the present cropping patterns, which are getting more and more intensive both in respect of the number of crops grown per year and in respect of the intensity of inputs utilized in the production of these crops.

The Present Cropping Patterns

As indicated earlier, we can hardly describe all the cropping patterns within the framework of this paper. Therefore only important ones are highlighted. There are many ways in which a cropping pattern can be discussed.

A broad picture of the major cropping patterns in India can be presented by taking the major crops into consideration. To begin with, the south-westerly monsoon crops (kharif), bajra, maize, ragi, groundnut and cotton. Among the post-monsoon crops (rabi), wheat, sorghum (rabi)and gram can also be considered to be the base crops for describing the cropping patterns. With such an approach, the crop occupying the highest percentage of the sown area of the region is taken as the base crop and all other possible alternative crops which are sown in the region either as substitutes of the base crop in the same season or as the crops which fit in the rotation in the subsequent season, are considered in the pattern. Also these crops have been identified as associating themselves with a particular type of agroclimate, and certain other minor crops with similar requirements are grouped in one category. For example, wheat, barley and oats, are taken as one category. Similarly the minor millets (Paspalum, Setaria and Panicum spp.) are grouped with sorghum or bajra. Certain other crops, such as the plantation crops and other industrial crops are discussed separately.

Among the kharif crops, rice, jowar, bajra, maize, groundnut and cotton are the prominent crops to be considered the base crops for describing the kharif cropping patterns.

Kharif Season Cropping Patterns

The rice-based cropping patterns: Rice is grown in the high-rainfall area or in areas where supplemental irrigation is available to ensure good yields. If the crop has to depend solely on rainfall, it requires not less than 30 cm per month of rainfall over the entire growing period. However, only 9 per cent of the area in the country comes under this category, and it lies in the eastern parts. Nearly 45 per cent of the total rice area in India receives 30 cm per month of rainfall during at least two months (July and August) of the south-westerly monsoon and much less during other months. In contrast to these parts, the eastern and southern regions comprising Assam, West Bengal, coastal Orissa, coastal Andhra Pradesh, Karnataka (most part), Tamil Nadu and Kerala receive rainfall of 10 to 20 cm per month in four to eight consecutive months, starting earlier or going over later than the south-westerly monsoon months. With supplemental irrigation, 2 or 3 crops are taken in these areas. However, it has been observed that on an all-India basis, nearly 80% of rice is sown during June-September and the rest during the rest of the season. Areawise the mono-season belt occupies 53.6 per cent of the area (comprising Assam, West Bengal, coastal Orissa, coastal Andhra Pradesh, parts of Tamil Nadu, Karnataka and Kerala).

On an all-India basis, about 30 rice-based cropping patterns have been identified in different states. In the most humid areas of eastern India comprising Tripura, Manipur and Mizoram, rice is the exclusive crop. In Meghalaya, rice is alternated with cotton, vegetable and food-crops, whereas in Arunachal Pradesh, where rice is not grown exclusively, the alternative crops being maize, small millets and oilseeds. In parts of Assam, West Bengal, Bihar, Orissa and northern coastal districts of Andhra Pradesh, jute forms an important commercial crop alternative to rice. In West Bengal, besides rice and jute, pulses and maize are grown on a limited scale. In Bihar, rice is grown over 49 per cent(5.3 m ha) of its cropped area(14.2 per cent of all-India area), whereas pulses, wheat, jute, maize, sugarcane and oilseeds are the alternative crops. In Uttar Pradesh rice is grown on 19 per cent(4.6 m ha) of its cropped area and represents about 12.4 per cent of the all-India area under this crop. Rice is concentrated in the eastern districts of Uttar Pradesh where the alternative crops are pulses, groundnut, sugarcane, bajra and jowar in the decreasing order of their importance. Tobacco is grown in some districts.

In Orissa, rice is grown on more than 50 per cent of the area, whereas the alternative crops are: pulses, ragi, oilseeds, maize and small millets. in Madhya Pradesh rice is grown in the Chattisgarh area on 4.3 m ha(11.7 per cent of the all-India rice area), but the crop suffers because of inadequate rainfall and irrigation. The important alternative crops of this area are: small millets, pulses and groundnut. Wheat is also grown on a limited scale.

In the southern states, namely Andhra Pradesh, Tamil Nadu and Kerala rice is grown in more than one season and mostly under irrigation or under sufficient rainfall. Together, these three states have over 6.0 m ha, representing over 17 per cent of the all-India area under rice. Important alternative plantation crops in Andhra Pradesh are: pulses, groundnut, jowar, maize, sugarcane and tobacco. In Karnataka the crops alternative to rice are: ragi, plantation crops, bajra, cotton, groundnut, jowar and maize. In Kerala plantation crops and tapioca form the main plantation crops alternative to rice. in Maharashtra rice is grown mostly in the Konkan area over 1.3 m ha, along with ragi, pulses, rabi jowar, sugarcane, groundnuts and oilseeds. in other states, namely Gujarat, Jammu and Kashmir, Rajasthan and Himachal Pradesh, rice forms a minor plantation crop and is mostly grown with irrigation. However, in Punjab and Haryana and to some extent in western Uttar Pradesh owing to high water-table during this monsoon season, rice has become a major crops in such areas.

The kharif cereals other than rice. Maize, jowar and bajra form the main kharif cereals, whereas ragi and small millets come next and are grown on a limited area. by and large, maize is a crop grown commonly in high-rainfall areas, or on soils with a better capacity for retaining moisture, but with good drainage. Next comes jowar in the medium rainfall regions whereas bajra has been the main crop in areas with low or less dependable rainfall and on light textured soils. The extent of the area under these crops during the south-westerly monsoon season is maize, 5.6 m ha; jowar (kharif), 11 M.ha, and bajra,12.4 m ha. Even though these crops are spread all over the western, northern and southern India, the regions of these crops patterns are demarcated well to the west of 80o longitude (except that of maize). Ragi as a kharif cereal (2.4 m ha) is mainly concentrated in Karnataka, Tamil Nadu and Andhra Pradesh which account for main than 60 per cent of the total area under this crop in India. The cropping patterns based on each of these kharif cereals are discussed.

The maize-based cropping patterns. The largest area under the kharif maize is in Uttar Pradesh (1.4m ha), followed by Bihar (0.96 m ha), Rajasthan (0.78 m ha), Madhya Pradesh (0.58 m ha) and Punjab (0.52 m ha). In four states namely Gujarat, Jammu and Kashmir, Himachal Pradesh and Andhra Pradesh, the area under maize ranges from 0.24 to 0.28 m ha in each, whereas other states have much less area under it. Taking the rainfall of the maize growing areas under consideration, over 72 per cent of the areas receive 20-30 cm per month of rainfall in at least two months or more during the south westerly monsoon season.

On the all-India basis, about 12 cropping patterns have been identified. They have maize as the base crop. In the maize growing areas of Uttar Pradesh and Bihar, rice in kharif and wheat in rabi are the main alternative crops. In some areas, bajra, groundnut, sugarcane, ragi and pulses are taken as alternative crops. In Rajasthan maize is grown as an extensive crop in some areas, whereas at other places, it is replaced by small millets, pulses, groundnut and wheat(rabi) as alternative crop. in Madhya Pradesh mainly the kharif jowar is replaced by maize, whereas rice and groundnut are also grown to a limited extent. In Punjab maize has groundnut, fodder crops and wheat(rabi) as alternative crops. In other states, e.g. Gujarat, rice, groundnut, cotton and wheat form the alternative crops in the maize-growing areas of Himachal Pradesh, whereas in Andhra Pradesh, rice, kharif jowar, and oilseeds are grown in these areas.

The kharif jowar-based cropping patterns. The area under the kharif jowar in India is highest in Maharashtra (2.5 m ha), closely followed by Madhya Pradesh (2.3 m ha), whereas in each of the states of Rajasthan, Andhra Pradesh, Karnataka and Gujarat, the area under this crops is between 1.0 and 1.4 m ha. Jowar is mainly grown where rainfall distribution ranges from 10-20 per month at least for 3 to 4 months of the south-westerly monsoon or is still more abundant.

On the all-India basis, about 17 major cropping patterns have been identified. In them the base crops is kharif jowar. Most of the alternative crops are also of the type which can be grown under medium rainfall.

In Maharashtra cotton, pulses, groundnut and small millets are sown as alternative crops. In the adjacent states of Madhya Pradesh, besides the above alternative crops, wheat and fodder are sown. In Rajasthan wheat, cotton, bajra and maize are grown in the kharif-jowar tract, whereas in Andhra Pradesh, groundnuts, cotton, oilseeds and pulses form the main alternative crops. Besides cotton and groundnut, ragi is sown in the kharif-jowar tract of Karnataka, whereas in Gujarat, bajra, cotton and groundnut are the major alternative crops.

The bajra-based cropping patterns. Bajra is more drought-resistant crop than several other cereal crops and is generally preferred in low-rainfall areas and on light soils. The area under the bajra crop in India is about 12.4 m ha and Rajasthan (4.6 m ha) shares about the 2/3 total area. Maharashtra, Gujarat and Uttar Pradesh together have over 4.6 m ha, constituting an additional 1/3 area under bajra, in India. Over 66 per cent of this crop is grown in areas receiving 10-20 cm per month of rainfall, extending over 1 to 4 months of the south-westerly monsoon.

On the all-India basis, about 20 major cropping patterns have been identified with bajra. However, it may be observed that jowar and bajra are grown mostly under identical environmental conditions and both have a wide spectrum adaptability in respect of rainfall, temperature and rainfall.

Considering the cropping patterns in different states, bajra is grown along with pulses, groundnut, oilseeds and kharif jowar in Rajasthan. Gujarat has a similar cropping pattern in its bajra areas, except that cotton and tobacco are also grown. In Maharashtra besides having some areas solely under bajra, pulses, wheat, rabi jowar, groundnut and cotton are substituted for it. In Uttar Pradesh, maize, rice and wheat form the main alternative crops to this crop.

The groundnut based cropping patterns. Groundnut is sown over an area of about 7.2 m ha, mostly in five major groundnut-producing states of Gujarat (24.4 per cent area), Andhra Pradesh (20.2) per cent), Tamil Nadu (13.5 per cent), Maharashtra (12.2 per cent) and Karnataka (12.0 per cent). Five other states viz. Madhya Pradesh, Uttar Pradesh, Punjab, Rajasthan and Orissa together have about 17.3 per cent of the total area under this crop. The rainfall in the groundnut area ranges from 20-30 cm per month in one of the monsoon months and much less in the other months. In some cases the rainfall is even less than 10 cm. per month during the growth of the crop. The irrigated area under groundnut is very small and that too, in a few states only, viz. Punjab(16.4 per cent), Tamil Nadu (13.3 per cent)and Andhra Pradesh (12.5 per cent).

On the all-India level, about 9 cropping patterns have been identified with this crop. In Gujarat besides the sole crop of groundnut in some areas, bajra, is the major alternative crop, whereas the kharif jowar, cotton and pulses are also grown in this tract. In Andhra Pradesh and Tamil Nadu, this crop receives irrigation in some areas and rice forms an alternative crop. Under rainfed conditions, bajra, kharif jowar, small millets, cotton and pulses are grown as alternative crops. In Maharashtra both the kharif and rabi jowar and small millets are important alternative crops. In Karnataka also, jowar is the major alternative crop, whereas cotton, tobacco, sugarcane and wheat are also grown in this tract.

The cotton-based cropping patterns. Cotton is grown over 7.6 m ha in India. Maharashtra shares 36 per cent (2.8 m ha), followed by Gujarat with 21 per cent (1.6 m ha), Karnataka with 13 per cent (1 m ha) and Madhya Pradesh with 9 per cent (0.6 m ha) of the area. Together, these four states account for about 80 per cent of the area under cotton. Other cotton-growing states with smaller areas are Punjab, with 5 per cent (0.4 m ha), Andhra Pradesh and Tamil Nadu each with 4 per cent (0.31 m ha), Haryana and Rajasthan with 3 per cent of each (0.2 m ha each). Most of the cotton areas in the country are under the high to medium rainfall zone. The cotton grown in Madhya Pradesh, Maharashtra, Karnataka, and Andhra Pradesh (4.8 m ha) is rainfed, whereas in Gujarat and Tamil Nadu (1.93 m ha) it receives partial irrigation 16-20 per cent of the area). The area under cotton in Punjab, Haryana, Rajasthan and Uttar Pradesh (0.8 m ha)gets adequate irrigation, ranging from 71 to 97 per cent of the area. These growing conditions, together with the species of cotton grown, determine the duration of the crop which may vary from about 5 to 9 months.

On the all-India basis, about 16 broad cropping patterns have been identified. In Maharashtra, Madhya Pradesh, Andhra Pradesh and Karnataka, the cropping patterns in the cotton-growing areas are mostly similar owing to identical rainfall. These patterns include jowar (kharif and rabi), groundnut and small millets. Pulses and wheat are also grown in a limited area. In some pockets, where irrigation is available, rice and sugarcane are also grown. In Gujarat, rice, tobacco and maize are grown, besides the rainfed crops, e.g. jowar and bajra.

The Rabi Season Cropping Patterns

Among the rabi crops, wheat, together with barley and oats, jowar and gram, are the main base crops in the rabi cropping patterns. Generally, wheat and gram are concentrated in the subtropical region in northern India, whereas the rabi sorghum is grown mostly in the Deccan. The extent of these areas in different states is as follows:

The wheat-and-gram-based cropping patterns. These two crops are grown under identical climate and can often be substituted for each other. The core of the wheat region responsible for 70 per cent of the area and 76 per cent of production comprises Punjab, Haryana, Delhi, Uttar Pradesh, and Madhya Pradesh, flanked by Rajasthan and Gujarat in the western region and Bihar and West Bengal in the eastern region. This area has an extensive irrigation system ranging from 85 per cent area in Punjab to 51 per cent in Bihar. The rainfall during the south-westerly monsoon is also fairly high with over 20 cm to 30 cm of rainfall in at least two out of the four months of the rainy season. However, winter showers are scattered and form less than 2.5 cm in each month from November to February.

On the all-India level, about 19 cropping patterns have been identified with wheat and 7 cropping patterns with gram. In Uttar Pradesh, maize, rice, jowar (K), small millets and groundnut form the main crops preceding wheat and gram. Generally, gram is grown on more moisture- retentive soils, but with little irrigation or in areas with less of rainfall. In Madhya Pradesh, wheat is grown with stored moisture, with little irrigation and rainfall during the crop period. The crop suffers heavily for want of adequate moisture with the resultant low yields (57 per cent of the all-India yield). The kharif jowar, groundnut, oilseeds, cotton, small millets and fodders form the alternative crops to wheat and gram. In Punjab, 85 per cent of the wheat area is under irrigation and, therefore, has rice, maize, fodders, bajra and cotton as the crops preceding wheat. The area under gram in Punjab is very meagre (4.2 per cent of the all-India gram area). In Rajasthan, the kharif jowar fodders and bajra precede wheat, whereas gram and other oil seeds form alternative crops in winter. In Bihar, rice, maize and pulses are the main preceding crops, wheat, in the wheat-growing areas, whereas oilseeds and bajra are also grown as alternative crops. In Haryana, wheat and gram are the main alternative crops in winter. Rice, maize, bajra and jowar form the main preceding crops. In Maharashtra, most of the wheat crop is grown on residual moisture, bajra and other small millets or short-duration pulses form the monsoon crop in the wheat areas. Generally, heavy black cotton soils of Maharashtra and the adjacent Madhya Pradesh are left fallow in the kharif season for operational difficulties and wheat is grown after the cessation of rains with stored moisture. In Maharashtra, the rabi jowar is a crop alternative to wheat.

Rabi jowar-based cropping patterns: On the all-India level, about 13 cropping patterns have been identified with the rabi jowar. Maharashtra has the largest number of these cropping patterns, wherein starting with the exclusive rabi jowar, bajra, pulses, oilseeds and tobacco are grown as alternative crops. In Karnataka, small millets, groundnut, bajra, pulses and oilseeds form alternative crops to the rabi jowar. Cotton and tobacco are also grown in some parts of the rabi-jowar area of Karnataka. In Andhra Pradesh, short-duration pulses, small millets, paddy and oilseeds form the main alternative crops in the jowar area.

Plantation and Other Commercial Crops: Crops under this category include sugarcane, tobacco, potato, jute, tea, coffee, coconut, rubber and other crops, such as spices and condiments. Some of them are seasonal, some annual and some perennial. Generally, the areas occupied by them are very limited as compared with food and other crops. Nevertheless, they are important commercially. Most of them require specific environmental conditions and from the point of view of cropping patterns, they are concentrated in some particular regions. Be- sides, certain horticultural crops, such as apple, mango and citrus, are important. The extent of the area and the regions in which they are grown are shown below:

In several sugarcane-growing areas, mono-cropping is practised, and during the interval between the crops, short duration seasonal crops are grown. In U.P., Bihar, Punjab and Haryana, wheat and maize are the rotation crops. rice is also grown in some areas. In the southern states, namely Tamil Nadu, Karnataka and Andhra Pradesh, ragi, rice and pulses are grown along with sugarcane. In Maharashtra, pulses, jowar and cotton are grown.

In the potato-growing region, maize, pulses, wheat are the alternative crops. in the tobacco-growing areas, depending on the season and the type of tobacco, jowar, oilseeds and maize are grown in rotation. in the jute-growing areas, rice is the usual alternative crop.

In the case of plantation-crops, intercropping with pulses and fodder crops is common. Spices and condiments are generally grown on fertile soils. Chillies are rotated with jowar, whereas onion, coriander, turmeric and ginger are grown as mixed crops with other seasonal crops.

Mixed Cropping. Crops mixtures are widely grown, especially during the kharif season. Pulses and some oilseeds are grown with maize, jowar and bajra. Lowland rice is invariably grown unmixed, but in the case of upland rice, several mixtures are prevalent in eastern Uttar Pradesh, with Chotanagpur Division of Bihar and in the Chhatisgarh Division of Madhya Pradesh. During the rabi season, especially in the unirrigated area of the north, wheat and barley and wheat and gram or wheat + barley + gram are the mixtures of grain crops. Brassica and safflower are grown mixed with gram or even with wheat. Mixed cropping was considered by researchers a primitive practice, but now many researchers regard mixed cropping as the most efficient way of using land. Several new mixtures have recently been suggested. They ensure an efficient utilization of sunshine and land. Breeders are developing plant types in pulses and oilseeds, with good compatibility with row crops.

DIVERSIFICATION OF CROPPING PATTERNS IN INDIA

The Cropping Patters in India underwent several changes with the advent of modern agricultural technology, especially during the period of the Green Revolution in the late sixties and early seventies. There is a continuous surge for diversified agriculture in terms of crops, primarily on economic considerations. The crop pattern changes, however, are the outcome of the interactive effect of many factors which can be broadly categorized into the following five groups:

These factors are not watertight but inter-related. For instance, the adoption of crop technologies is influenced not only by resource related factors but also by institutional and infrastructure factors. Similarly, government policies - both supportive and regulatory in nature - affect both the input and output prices. Likewise, special government programmes also affect area allocation and crop composition. More importantly, both the economic liberalization policies as well as the globalization process are also exerting strong pressures on the area allocation decision of farmers, essentially through their impact on the relative prices of inputs and outputs. Although the factors that influence the area allocation decision of farmers are all important, they obviously differ in terms of the relative importance both across farm groups and resource regions. While factors such as food and fodder self-sufficiency, farm size, and investment constraints are important in influencing the area allocation pattern among smaller farms, larger farmers with an ability to circumvent resources constraints usually go more by economic considerations based on relative crop prices than by other non-economic considerations. Similarly, economic factors play a relatively stronger role in influencing the crop pattern in areas with a better irrigation and infrastructure potential. In such areas, commercialization and market networks co-evolve to make the farmers more dynamic and highly responsive to economic impulses.

Changes in Cropping Patterns

What is most notable is the change in the relative importance of these factors over time. From a very generalized perspective, Indian agriculture is increasingly getting influenced more and more by economic factors. This need not be surprising because irrigation expansion, infrastructure development, penetration of rural markets, development and spread of short duration and drought resistant crop technologies have all contributed to minimizing the role of non-economic factors in crop choice of even small farmers. What is more, the reform initiatives undertaken in the context of the ongoing agricultural liberalization and globalization policies are also going to further strengthen the role of price related economic incentives in determining crop composition both at the micro and macro levels. Obviously, such a changing economic environment will also ensure that government price and trade policies will become still more powerful instruments for directing area allocation decisions of farmers, aligning thereby the crop pattern changes in line with the changing demand-supply conditions. In a condition where agricultural growth results more from productivity improvement than from area expansion, the increasing role that price related economic incentives play in crop choice can also pave the way for the next stage of agricultural evolution where growth originates more and more from value-added production.

The major change in cropping pattern that have been observed in India is a substantial area shift from cereals to non-cereals. Although cereals gained a marginal increase in area share in the first decade of the Green Revolution, their area and share declined gradually thereafter. Between 1966/67 and 1996/97, 3.35 percent of the gross cultivated area (GCA) - representing approximately about 5.7 million hectares (m/ha) - has shifted from cereal crops to non-cereal crops. Since the area share of pulses taken as a group also declined by 1.57 percent during the same period, the area share of food grains as a group declined by 4.92 percent during 1966-97. In area terms, the shift from food grains to non-food grains involves an approximate area of about 8.36 m/ha. While cereals and pulses have lost area, the major gainers of this area shift are the non-food grain crops especially oilseeds. The area share of oilseeds as a group that has gone up by 4.08 percent accounts for about 83 percent of the 8.36 m/ha involved in the area shift between 1966/67 and 1996/97. As we consider the share of individual crops within cereals, although the share of cereals as a group has declined, the area share of rice has increased continuously over all the four periods. Wheat, although having a declining area share until 1986/87, also gained in its share when the entire period is considered. Thus, the area loss of cereals can be attributed entirely to the declining area share of coarse cereals, especially sorghum, pearl millet, barely and small millets. It can be noted that even within coarse cereals, the area share of maize shows a marginal improvement over the years. Within oilseeds, the crops showing steady improvement in their area share are: rapeseed and mustard, soybean and sunflower. Among these three oilseeds gaining in area share, rapeseed and mustard are substantially grown as intercrops with wheat. On the other hand, the area shares of other oilseeds including groundnut (that has a dominant area share within oilseeds) but excluding coconut, which is more a plantation crop than field crop, have either fluctuated or declined. The area share of groundnut, though improved during the last period, has declined as compared to its share in the pre-Green Revolution period.

But, the declining area share of crops - especially those with only a marginal change in their area share - need not necessarily imply a decline in the actual area under these crops. Since the Gross Cropped Area (GCA) is constantly increasing over time, partly through an expansion of net sown areas as in the initial stages of the Green Revolution and partly through increasing intensity of cropping mainly by irrigation expansion, the declining area share can coincide with an increase in absolute increase in the area under crops. This can be seen from Tables 4 and 5 showing actual area under various crops and their groups. Although the increase in the area share of other commercial crops is not as dramatic as that of oilseeds, it is still notable because of its implications for the direction of Indian agriculture. But, among these other commercial crops that cover fibres, spices, fruits and vegetables, and other field crops such as tobacco and sugar cane and plantation crops, only spices, fruits and vegetables show a steady improvement in their area shares, whereas others show mostly a declining trend. This is particularly true for fibres and other field crops that have over four fifths of the total area under the broad group of other commercial crops. However, sugar cane, included in the category of other field crops, shows an increase in its area share. This is also true for cotton included in the fibre category. While all spice crops show a gradual increase in their area share, only three of the six crops included in the fruits and vegetables category show a gain in their area share over the years. These crops are banana, potato and onion.

Development of Small Scale Industries in India is being pursued since the beginning of the planning era in 1950-51. The main objectives of the comprehensive plan of small industries is the creation of widespread employment opportunities, reduction of inequities, addressing regional imbalances and creation of a base for entrepreneurial development. In the 1950s, when the various programmes for promotion of small industries were formulated, the emphasis was to gear up production with a view to cater to domestic requirements. As a result of the policy of planned economic and industrial development followed during the last fifty years, village and small industries have made a phenomenal progress in different parts of the country including rural, semi-urban and even hilly and remote areas and are now making a significant contribution towards the National Economy, including export earnings.

Significance in National Economy

The share of village and small industries in 2005-06 has been estimated at about 49% of gross value of industrial output. This sector offers employment opportunities to about 28 million persons. In the field of exports, this sector accounted for 36% of the total export of the country.

The VSI Sector consists broadly of :­

i) Traditional industries (e.g. handlooms, khadi and village industries and handicrafts, etc.) and

ii) Modem small scale industries

Development of modem small industries has been one of the most significant and characteristic features of industrial development in the country. These industries now account for more than 60% of the output in the VSI Sector. In 1985-86 small industries produced goods worth about Rs. 40,000 million and provided employment to about 9 million persons. The following table shows the trends in growth of small scale industries in recent years:

In spite of phenomenal growth in the small scale and village industries sector, there has been relatively high rate of mortality due to various factors. Apart from the other factors which have caused a high mortality rate, the most important aspect of sickness has been identified by several studies as arising due to basic weakness in the marketing function of the small enterprise as they exist today. While the technical financial and managerial support provided to the small industry is controllable internally by the organisation, marketing is the only function which is considerably influenced by external factors affecting the business. While all the other activities concerned with a business enterprise involve spending of money, marketing is the most significant activity which leads to inflow of funds which is essential for financial viability of the business.

Basic to the whole activity of an enterprise is the marketing of products. If the enterprise is not able to sell what is produced, it will go out of existence.

General Problems of the Small Scale Sector as revealed in various studies

An important factor contributing towards sickness of the unit is low quality of product. A small manufacturer with limited finance, technical knowledge and information about the market trends to knowingly or unknowingly sacrifies quality. There is a credibility gap between the purchasing organisation, both in private and public sector and the small scale suppliers regarding quality, delivery schedule, packaging, price, after-sales-service, etc. The increasing awareness of the consumer about his expectations in regard to quality and performance is either being ignored or not given the importance it deserves by small scale units.

The small scale producers have inadequate knowledge about the market trends, changes in tastes and consumer preference. The pricing concepts are not aligned with consumer want and goods are produced without a proper market surveyor ascertaining before hand whether there is a demand for a particular product.

Small Scale and Ancillary ~units suffer considerably from inadequate supply of raw materials and/or high cost. As a result, the cost of production becomes disproportionately high, undermining the competitive edge. For numerous raw material, the small scale units have to depend upon the large scale industries or multinationals which for obvious reasons do not look after the former's interest.

Exploitation by middle man

The small scale units have to depend upon the existing distribution channels, need middle man or wholesalers/distributors/retailers. The middlemen exploit the small scale units. They are only interested in maximum commission. They invariably shift their loyalties based on their profitability. On many occasions, they expect the manufacturer to receive their payments on consignment sales. This affects the viability of the units as their cash flow is affected.

Government Policy and Support Services

Marketing has been recognised, even by the Government of India as a vital area, where extension of institutional assistance is necessary to sustain the small scale industry in general and contain sickness in the sector in particular.

Catalytic role of Promotional Agencies ­-

Government Support Services

The Government has launched marketing support programmes for the benefit of the Small Scale Sector as enumerated below :­-

1.Assistance to the small scale units for participation under the Government Purchase Programme - Govt. being the single largest buyer in the country ­both Central and State Government and Govt. undertakings buy over Rs. 2000 crore annually.

Reservation of items for exclusive purchase from the Small Scale Sector.

Reservation of items for production in the Small Scale Sector.

Identification of 'tiny' units with investment upto Rs.2 lakhs in plant and machinery and located in towns with population less than 50,000 for offering special incentives.

Liberalisation of procedures and conditions for financial assistance from commercial banks and other institutions.

Special facilities for import of raw material and components.

Intensification of extension services through the Small Industries Service Institutes, Branch Institutes and Extension Centres apart from Tool Rooms and Regional Testing Centres.

Provision of testing facility at the testing centres.

Supply of essential raw material through SSIDCs and also import raw materials.

Setting up of Trade Centres to provide outlets for the marketing of the products of the small scale sector.

Design Development Centres for Handloom and Small Scale Sectors.

Transfer of Technology by importing know-how and latest equipment/machinery.

Participation in the Exhibitions and Buyer-Seller Meet.

Promotional Agencies like Handicrafts and Handloom Development Corporation, Cottage Industries Emporium, TDA, NSIC, SSIDC, Handloom Weaving Cooperative Societies, Super Bazars have been playing catalytic role in extending support services in promoting the products of Small Scale & Village Sector.

To illustrate an example, the Handicrafts and Handloom Corporation have inducted the products of tiny sector into the European market. They had arranged a tie-up with major Departmental Stores in the USA. The brand image has helped in creating quality image of the product. European designs have been introduced and the product of tiny sector is finding a regular market in the export markets. The master weavers have been trained in foreign fashion trends.

In a similar manner, the growth of Garment Industry, Hosiery Knitwear Industry and Silk Industry are other examples.

Involvemental Marketing

Marketing is a primary function of an entrepreneur. The concept of marketing is relevant throughout the functioning of an enterprise, including the areas such as quality control and not merely at the stage of selling and distribution. The primary responsibility for marketing shall invariably rest on the entrepreneur or the Manager at the helm of the enterprise. The Government through its policy measures can only provide facilities and organisational support. As already enumerated, some of the major problems in marketing of small industries products can be resolved through well-planned marketing research activity for small industries.

The SIET Institute had conducted interviews with the successful entrepreneurs who have almost had no problems in developing their industries. Contacts were made with 685 successful small industrialists and their success stories recorded. These success stories were classified under certain broad categories. In every category, involvement of entrepreneur is significant. This gave rise to the terminology "Involvemental Marketing". Involvemental Marketing means the involvement of entrepreneur in his own organisation and also with the clients organisation with a limited purpose to achieve market for his products.

Know the product well. About 15-20% success stories can be attributed to the entrepreneur's knowledge of his products, its alternate uses, its salient characteristics, its substitute uses etc.

An instance is that of a chalk piece manufacturer in Karnataka who could not market his chalk pieces. He studied the market of chalk pieces and then approached a big pharmaceutical company to use his chalk in one cubic inch form in evaporating tower in the granulation department. He gave the comparative economics of using silicon jelly and chalk pieces in the 1" cubic form. He proved that the use of chalk pieces in evaporating tower instead of silicon jelly reduces expenditure by about 50%. Now this group of pharmaceutical concerns is using chalk instead of chemical moisture absorbents.

Know thy marketing seasons well - A well-known engine valve manufacturer in small sector wanted to become the original equipment supplier to a large automobile company. He tried his best but could not succeed. He was a patient entrepreneur and had been following up with the organisation regularly. He found that at the end of the financial year, the organisation was keen to reach the production targets. The entrepreneur at this time again approached the organisation and helped them out at a crucial time by supplying the required number of organic valves which he had deliberately kept in stock.

Govt. purchases are generally made in the months of February/March. Most of the small scale units have understood this aspect and keep their material ready at the year ending i.e. February and March to cater to the Government Departments who are anxious to see that the budget is not lapsed.

Know thy sales promotion methods - In the first stage, the entrepreneurs make a survey of the persons connected with the purchase. They collect information about the strong and weak points of concerned persons. It is surprising to note that the entrepreneurs from western region, particularly Maharashtra have a knack of using health factors as a carrier of motivation. We have come across more than 20 entrepreneurs using health factor to motivate customers.

In short, the entrepreneur will have to adopt all involvemental marketing techniques to promote his business. In our opinion, there is lack of awareness of complete support programmes and the methodology to avail of the existing benefits.

Besides, time has come when the market intelligence should percolate down the grass-root level. The existing facilities like the opening of Market Development Centres, Super Bazars and other sales outlets should expand to the interiors. This requires speedy expansion. This will provide platform to the tiny sector for sale of their products and ensure remunerative price. With involvemental marketing the units could grow.

Prepared by Shri L.K.Baweja, Regional Manager, National Small Industries Corporation

1.1 Since the history of mankind, agriculture evolved round the basic food needs of man and developed principles and practices in crop production including field management. With changing situation, technological development have shifted the traditional agriculture from more crop production to mixed farming involving allied activities like animal husbandry, sericulture, pisciculture etc. Need for technological development in agriculture in our country arose due to the fact that -

- ­the structure of economy remained predominantly agriculture;

- the cultivable land being limited, productivity has to play an important role to meet the domestic and export requirements of farm produce, and

- the development plans also aimed at self-sufficiency in farm production, in particular, foodgrains to meet the growing demand of population.

The technological development in agriculture, necessarily mean the use of modern inputs at micro level to improve productivity of land and accruing desired economic benefits therefrom. In this context, the most important inputs that play crucial role in agricultural development are :­

1.2 Present agriculture development is not product specific but operates within a specific socio-economic system and inter-sectoral dependency. It is, therefore, essential to create impact of the technology in agriculture on the entire farming community to achieve the desired goals of development. The review of agricultural development in the country indicates that 50 million tonnes of foodgrains production capacity just 30 years back has reached around 210 million tones in 2005-06. Indeed it is an impressive achievement, yet we have to reach more than the current. Our primary task is therefore to identify the various known inputs in agricultural and make them more popular amongst the farming community through selective measures such as multiple cropping, use of high-yielding seeds and such other inputs including irrigation. But some of the short comings responsible for slow progress in agricultural development are :­

- Still traditional low yielding varieties are used in dry farming,

- Lack of proper agronomic practices in water conservation, sowing methods, seed rate, fertiliser use and absence of control of pests and diseases.

The benefits of development in agricultural sector have been derived mostly by the affluent community of rural sector, whereas little access to such technologies was available to the weaker sections of the farming community such as small and marginal farmers.

2. Place of Extension in Rural Development

2.1 In this background, it is of utmost importance to play an active role by various extension agencies operating in the rural sector for development of all sections of the population through improved technology in agriculture and allied activities. The extension process is concerned with communicating the technology of scientific agriculture to the farmers in order to transform traditional level of agriculture to better for improving their economic conditions. Hence, extension in agriculture would mean stretching out the knowledge to farmers on adoption of the new technology and improved practices in various sub-sectors like crop production, livestock rearing fodder production, sericulture, bee-keeping, horticulture etc.

2.2 Extension aims at changing the outlook and attitude ofthe farming community in general and it seeks means to improve the farm operations and farmer's family life in totality on their own initiative. As the farmers are mostly small and marginal, they lack direct access to developing agricultural technology. Educating such a group of farmers has to be, therefore, a sustained process to keep pace with rapidly changing agricultural technology.

3. Concept and Objective of Extension

3.1 The modern concept of extension process is working with rural people through informal education for achieving total community development covering several activities, agriculture being the most important. Agricultural extension is considered to be a special branch of rural extension dealing with several economic and social aspects of farming community such as:­

i) Efficient farm production

ii) Efficient marketing, distribution and utilisation of farm produce

iii) Conservation, development and use of natural resources for farm sector development

iv) Efficient farm management

v) Improving the standard of living of rural population

vi) Development of leadership for community improvement.

3.2 However, the objectives of the extension programmes depend upon socio­economic conditions of the people in the area and need to transmit the latest developments in the field of agriculture to suit their requirements. Thus, the objectives have been set out in all such programmes primarily:

i) to assist people to identify their problems and felt and unfelt needs;

ii) to develop leadership among various sectors of the rural community;

iii) to transmit information based on agricultural research and applied experience with a view to bring about larger farm community under the modern technology;

iv) to keep research workers constantly informed about the problems at farm level to offer solutions based on further research in the specific area concerned.

Extension is a continuous process of transmitting the knowledge on latest development in agricultural technology to a section of community for field application and feedback process to know the problems arising for further improvement of technology.

4. Philosophy of Extension

4.1 The philosophy of extension is primarily based on (1) development of the individual farmer and (2) interaction within the various sectors of rural community to avoid imbalanced development. In this process the individual farmer is supreme and the first training group that one can think of is the farm family. Secondly, extension services are rendered with a view to plan, execute and evaluate the technological changes adopted by farmers. Thirdly, extension aims at teaching the farming community and motivating them to bring the latest development into practice through a spontaneous response rather than forcing them to take it up. Naturally, certain techniques and tools are required to teach the people how to help themselves and to ensure that extension agency acts as a catalyst or change agent.

5. Function of Extension

5.1 While trying to introduce a new concept or a new idea to the farming community, one has naturally to consider how this would be adopted by a large majority to reap maximum benefit from out of the new technology. Yet, this function cannot be adequately achieved unless we bring desirable change in the human behaviour particularly the farming community in the rural setting. The change in behaviour of the rural community it possible through many ways but the most important ones are :­

(i) Change in knowledge: The latest knowledge and information about the technological development to the farming community help in creating awareness of the facts and thereby likely change in attitudes.

(ii) Change in attitude: The change in attitude is generally difficult in the farming community due to environmental situation in which they operate and also due to certain extent of superstitions towards adopting new technology in agriculture.

Motivation will help change attitude to some extent, but attitudinal change is possible in the farming community under the following circumstances.

(a) Change in age level: Responsibility awareness factor

(b) Change in status: Financial and social awareness factor

(c) Personal and natural crises' Family death, illness, war and such other awareness factors.

As mentioned earlier, group reaction is the most important value in agricultural extension in changing the attitude of the farming community. Most farmers confirm to the attitude of the members of their respective groups, based on social or economic structure in rural society. Relatively few maintain an independent attitudes towards adoption process. The change in attitudes of groups is largely observed;

a) by sharing common knowledge through radio, television, newspapers and experience of people in other villages of areas.

b) by sharing in planning process or functioning in a group activity like cooperative society, clubs etc.

c) By sharing in decision making through group discussions for common benefit of the rural community such as lift irrigation scheme etc.

(iii) Change in skills: Change in skills could be achieved by giving adequate knowledge about the new technology and its likely chances of adoption by various farming groups. Since the skills are either mental or manual, both of them accelerate adoption process in farming community for desired level.6. MOTIVATION PROCESS IN RURAL PEOPLE

6.1 Motivation is basically an inner drive or impulses or intention to do certain acts in a specific manner to achieve the desired goal. In this sense, the function of motivating rural people primarily depends upon satisfaction of some felt and unfelt needs such as :

i. Desire for security: in terms of economic, social, psychological and spiritual one.

ii. Desire for affection or response: in terms of companionship, social mindedness, confidence, etc.

iii. Desire for new experience - in terms of adventure, new ways of doing the existing practices.

Therefore, it is worthwhile to analyse the felt and unfelt needs of the farming community in rural sector which accelerate motivation process through satisfaction of such needs. While introducing a new concepts or a new technology to the farmers, the most important consideration is how to ensure satisfaction of the felt needs of the larger section of farming community for putting it into action.

6.2 However, individual farmer is motivated through satisfaction of a specific need within the need hierarchy which is in the order of :

Every individual is placed at one of the hierarchy levels and for motivating him one has to identify the specific need satisfaction of the farming community for favourable acceptance of the new technology to be introduced. Yet, an individual ceases to get motivated on satisfaction of one need and not desirous of fulfilling the next need in the hierarchy.

6.3 Another way of motivating different farmers' groups could be through proper planning of adoption process within the entire community. Some of the essential steps of planning adoption process are :­

i. Attention: Farmers should get direct attention to new and better farming techniques through use of various extension tools.

ii. Interest: To sustain interest in the farming community. One idea at a time should be introduced to avoid lack of interest.

iii. Desire: The farming community adopts new farm technology only when there is significant urge for satisfying the specific need.

iv. Conviction: The farming community should acquire confidence in the new technology by doing themselves and creating ability within to do things.

v. Action: The conviction of the farming community is generally converted ultimately into action process in adoption of new technology.

vi. Satisfaction: The final product of the earlier steps is satisfaction that results in adopting the new technology.

7. Rural Sociology

7.1 Rural Sociology has direct impact on designing the agricultural extension system. As extension aims at developing not only individuals but also society as a whole, the analysis of various groups in rural community is most important sociological aspects which bring the desired change in the attitude of the rural community for accepting the new technological change in agriculture. Structure and development of rural society is the most crucial for rural extension. Rural society comprises of different groups like (1) Primary (2) Secondary and (3) Formal or Environmental. While dealing with the group, the leadership, which induces technology transfer is an important factor. Every group has a informal leader who

creates interest within members of his own group for acceptance of specific activity in the rural society. Even within the group, different farmers may like to get advice from different leaders depending upon the specific need like agricultural, social and religious aspects, etc. hence not only the individuals, but also the social groups play an important role in changing attitude in favour of rural extension.

8. 'Training' and 'Visit' system - A new approach to extension:

8.1 Considering the philosophy of extension and influence of rural sociology in changing the attitude and acceptance of new ideas by various social and economic groups in the society, an approach has been designed for rural extension popularly known as 'training' and 'visit' system. The system is basically confined to reorganisation of the existing structure and setting up of appropriate extension agency to motivate the farmers to adopt latest technological developments in the farm sector. This system is very simple and requiring just re-orientation of organisation and methods down the extension hierarchy with a single line of command, from the state level to villages level in which definite sequencing of farm activities and also proper sequencing of time for different operations during a specific agriculture season are planned much in advance.

8.2 A single chain of command for both training and extension activities operates from the Director of Agriculture to the District Agriculture Officer and Agriculture Extension Officer down to the village level worker. The village level worker (VL W) is supposed to extend the technical package in agricultural activities to about 800 to 1200 farm families. These families are divided to form homogeneous as far as possible, groups on the basis of socio-economic structure of rural society with a view to transmit the technical package effectively by the VL W. The planning is done for each agricultural season which is divided into 15 days' segments. In this process, the most important element is training the village level worker, the most vital link in the extension who is given a day's training at the commencement of each fortnightly segment on the critical farm operations. The farmers are educated by VL W during the particular agricultural season with reference to principal crops in the area and the segment. On execution of the specific segment of 15 days, the VL W is again required to go for a day's training at the block level with the Agricultural Extension Officer to review the problems of implementation and the difficulties envisaged by the farmers and seek solutions thereto. The agricultural plans and the segments are backed up by practical and group discussions and even learning by handling disease specimen, pest control, equipment etc. that the village level worker needs know thoroughly. Thus the VL W gets continuous training.

8.3 Besides evaluation of implementation of the seasonal plan by farming community their levels of technology is ensured through the system. The higher level officials like Agricultural Extension Officer at the block level, District Agricultural Officer at the District level and the subject matter specialists, Agronomist, Entomologists, Pathologists, etc. are fully equipped with the programme and problems that could be encountered in the technical package. At the highest level, the Director of Agriculture in the State, review of various programmes supported by their extension system is evaluated at the end of the year and fresh plans are prepared for subsequent year based on the experience gained during the previous year. Therefore, the training aspects of the system is critically examined with a view to have a thorough knowledge of various aspects of farm technical package during a particular season.

8.4 While executing the segmental plans in a particular agricultural season, the village level worker has to identify roughly 8-10 homogeneous groups based on social or economic structure consisting of about 100 to 150 families each. Each group must be visited once every fortnight on a specific day. Since VL W cannot contact entire group in large number he plans his visit in the morning to about 10 contact farmers in the group who are generally progressive in adoption of the new technology. After meeting the selected progressive farmers the meeting of the entire group is arranged either in the afternoon or in the evening to transmit the programme to all the members of the group. Thus, the individual groups get encouragement to take up the timely and proper farm operations.

8.5 As mentioned earlier, the Agricultural Extension Officer is trained once a month by the District Agricultural Officer and subject matter specialists including University Research worker in both theoretical and practical aspects of various farm operations at the demonstration centres.

8.6 In 'Training' and 'Visit' system of extension an important aspects is transfer of the VL W from the jurisdiction of Community Development Department to the Department of Agriculture so that he can give more attention to the agriculture extension activities at the village level without diverting attention for other activities.

In this system the village level worker has been transformed into a confident respected and much sought for change agent.

9. Some Hints for Extension Process

9.1 Within the socio-economic structure prevailing in the rural setting, a few important hints for extension agent that help effective extension process are listed below :­

i. Never antagonise influential people in the social groups in the rural setting but

maintain contact with them to win their confidence for effectiveness.

ii. Go with an idea to serve the farming community and not to dictate as the supreme authority.

iii. Create attitude to learn from the farming community and general personal convictions, desire to help with basic assumptions like open mindedness, listening to the farming community and understanding what actually is happening in rural setting.

iv. For better impact repeated contacts, even spending nights with the farmers helps to gather a good picture of the problems of farming community and an idea of reality of the rural poor.

v. In extension one could support two friends, viz., a small group and an individual for discussions on a topic of their interest to create confidence and trust.

Prepared by Shri J.Sadakkadulla, Faculty Member Updated by Shri S.L.Gaur, Faculty Member Revised and Updated by Shri E.V. Murray, Member of Faculty, CAB HO No. 1391

Financial Inclusion – An Assessment of New Modalities and Alternative Models

Introduction

Rapid economic growth in India in the recent years has brought in its wake a number of concerns, which relate to expanding this growth across regions, sectors, and people. The major objective is to ensure inclusive growth by removing the constraints of poor infrastructure, improving economic efficiency and spreading the benefits of growth over a vast population, which has remained outside the purview of this development process. The financial sector in the country has also experienced revolutionary changes but there exist a large number of people whom the financial services revolution has effectively passed by, resulting in financial exclusion of this segment. Financial exclusion, which is generally the outcome of poverty, ignorance and environmental factors, is to a great extent related to supply side issues, i.e. lack of appropriate financial services for those that are excluded by the traditional system of instruments.

Against this backdrop, the article assesses some current initiatives that are attempting to promote greater financial inclusion in the country under various models, ensuring access to mainstream financial services through the provision of appropriate financial products.

The present scene

Financial inclusion, in the sense of extending banking products at an affordable cost to the vast sections of disadvantaged and low income groups, is not new to India. For more than three decades after nationalization of major commercial banks in 1969, Indian banking has shown tremendous growth in volume and outreach resulting in increase in the total number of branches of scheduled commercial banks from 8,321 in the year 1969 to 68,681 as at the end of March 2006 and reduction of the average population per branch office from 64,000 to 16,000 during the same period. Public sector banks were in the forefront of reaching out to sections that were once neglected and designing new, innovative loan products for agriculture and small-scale industries sectors is an outstanding example in this regard.

There are, however, concerns that banks have still not been able to reach a vast segment of the population and provide them with basic banking services. Growth has also not been uniform across all the regions/ States of the country and there still continue to be wide gaps in the availability of banking services in the rural areas. While from the policy angle none of the earlier measures aimed at broad basing their clientele has been withdrawn, the banks might be laying somewhat less emphasis on inclusive practices in view of the thrust on profitability.

The All India Debt and Investment Survey conducted by the National Sample Survey Organization has pointed out that between 1991 and 2002, the share of institutional finance in the outstanding cash dues of rural households decreased by 7 percentage points to 57 per cent, while share of non-institutional sources showed a corresponding increase. The survey also shows that the non-institutionalagencies had advanced credit to 15.5 per cent of rural households, while the institutionalagencies had financed 13.4 per cent households. Thus, on the whole, only about 29 per cent of the rural households obtained some form of financial assistance. Data published by the Reserve Bank show that the number of loan accounts of small borrowers with credit limit range of Rs.25,000/- or less decreased from 59 million in 1991 to 37 million in 2005, although thereafter it increased to 39 million in 2005.

One of the benchmarks employed to assess the degree of reach of financial services to the population of the country is the quantum of deposit accounts (current and savings) held as a ratio to the adult population. In the Indian context, taking into account the Census of 2001, the ratio of deposit accounts to the total adult population as at the end of March 2004 and 2005 are as under:

No of current accounts

(million)

No of savings accounts

(million)

Total no. of accounts

(million)

Adult population as per 2001 Census data*

(million)

Ratio of (3) to (4)

(1)

(2)

(3)

(4)

(5)

March 2004

16.55

304.35

320.90

541.0

59

(1)

(2)

(3)

(4)

(5)

March 2005

17.72

320.00

337.72

541.0

62

[Source : Reserve Bank of India Publications]

* The actual figures could be more taking into account the post-2001 accretion to the population. Together with multiple accounts maintained by the same persons, this could lead to lower coverage ratios.

Within the country also, there is a wide variation across states, from a low ratio of 21 per cent in the case of Nagaland to a somewhat high level of 89 per cent in the case of Kerala, as at the and of March 2004. Although financial exclusion has both absolute and relative connotations, the challenge is to include the segment which stands absolutely excluded.

Modalities of Inclusion

Microfinance and financial inclusion

Provision of micro finance through Self Help Groups (SHGs) since the early nineties through the SHG-Bank linkage Programme and the emergence of Non-Governmental Organizations (NGOs) as facilitators have been major developments in the field of rural finance. The strategy of linking SHGs to banks, initially through savings and later through loan products, has been able to ensure financial inclusion of the hitherto excluded sections of the society to a certain extent. Cumulatively, the number of SHGs linked to banks aggregated over 2.2 million as at the end of March 2006, which translates into an estimated 33 million poor families brought within the fold of formal banking services. It is important to note that about ninety per cent of the groups linked with banks are exclusive women's groups.

There are several micro finance institutions (MFIs) which normally have the organizational form of societies, trusts, cooperatives, non-banking financial companies (NBFCs) and not-for-profit companies set up under Section 25 of the Companies Act, 1956, which supplement the efforts of banks in providing financial services to the poor. The experience of the formal banking system partnering with such MFIs has been quite encouraging in several places.

Role of Lead Banks

The mechanics of financial inclusion would largely depend on the profile of the excluded population, as also the institutional framework available for the purpose. In the context of the multi-agency approach to rural banking in India, financial inclusion could involve several steps and the role of the coordination mechanism in the form of the Lead Bank in the district or the convenor of the State Level Bankers Committee (SLBC) at the state level assumes critical importance. The policy announcement of the Reserve Bank has envisaged an active role for the convener banks of the SLBCs in all states, who have been given the responsibility of reaching 100 per cent financial inclusion in at least one district in their area of operation.

Illustratively, the convenor of the SLBC has to undertake the following steps for ensuring financial inclusion in the pilot areas in the state:

Based on experience gained, other areas in the state may be covered in a time bound manner. On a priority basis, the districts covered under the National Rural Employment Guarantee Programme may also be taken up for financial inclusion, in particular, opening of "no-frills" accounts which would facilitate credit of drafts issued in favour of the beneficiaries, and formation of SHGs to support micro-enterprise-linked livelihoods on a sustainable basis.

Basic "no frills" bank accounts

At the first stage, there is a need for lowering the entry barriers to the banking system and simplifying procedures. Thanks to developments in micro finance, one of the myths held earlier by the banking system that the poor cannot save, has been demolished. Experience has shown that the poor can and do save, may be by way of thrift, and all they need is an appropriate product and access to the banking system. Holding a savings product to a substantial extent reduces financial exclusion. Moreover, the act of saving, however little it may be, reinforces longer-term thinking and a sense of responsibility for one’s future.

Keeping in view the need for the banking system to take urgent steps to bring about financial inclusion in the country, the Reserve Bank of India, in the Mid-Term Review of the Annual Policy for the year 2005-06, exhorted banks to make available a basic banking ‘no frills’ account either with nil or very low balances as well as charges that would make such accounts accessible to vast sections of the population. The nature and number of transactions in such accounts would be restricted and would be made known to customers in advance in a transparent manner. Several banks, both in the public and private sectors, have responded positively to this measure and devised no-frills accounts for the lower income groups.

Although such basic bank accounts are generally considered unprofitable, provision of such deposit accounts has been accepted the world over as a stepping stone to financial inclusion. In a somewhat different way, this requires bank branches to be aware of the surrounding areas in which they work and promotes a more outward-looking, customer-centric model to work alongside their usual profit-driven model. A basic 'no frill' account is just the beginning of a relationship and can pave the way to the customer availing of a variety of savings products and loan products for consumption, housing etc. The account can be used for sanctioning small overdraft facilities and making small value remittances at low cost. The same banking account can also be used by State Governments to provide social security services like health and calamity insurance under various schemes for the disadvantaged. Having such social security cover makes the financing of such persons less risky from the bank’s point of view and they can be financed for various purposes. Further, holders of the no-frills accounts who would be beneficiaries of the Employment Guarantee Scheme of the Government of India, can also be customers of banks over a longer time horizon.

General Credit cards (GCC)

It is almost a cliché that rural credit should adhere to the basic requirements of timeliness, adequacy and hassle-free delivery, apart from taking care of the financial needs of the customer in a wholistic manner, including consumption credit. To address these issues, several 'credit card' schemes have been devised and implemented by banks over the past. Such schemes have the flexibility of use and they fulfill the above requirements to a substantial extent. But all these schemes have so far been activity-specific, i.e. for farmers, artisans etc. The latest in the line is the General Credit Card (GCC) which does not target any specific functional group, but has the potential to address the credit needs of persons with small means having some income-generating activity, without bothering so much about the nature of the activity. Banks have flexibility in fixing the limit based on the assessment of income and cash flow of the entire household. The borrowers are eligible for availment of the credit facilities provided under GCC as per their requirement without any insistence on security and the purpose or end-use of the credit. To provide an incentive to banks for issuing the GCCs, fifty per cent of credit outstanding under GCC up to Rs.25,000 has been made eligible for being treated as indirect agricultural finance under the priority sector lending. While several banks have put in place schemes for issuing GCCs, the progress will have to be accelerated. As done earlier in the case of Kisan Credit Card Scheme, issue of GCC too can be made part of the corporate plans of all banks.

Microinsurance

More than credit, the poor need access to some form of insurance, as they are the most vulnerable to various types of risk to both life and property. They need suitably designed schemes offering health, life or property insurance: limited protection at a somewhat low contribution. It is heartening to know that insurance companies are coming up with schemes aimed at poorer sections of the population and designed to help them cover themselves collectively against risks, the delivery channels being banks, NGOs and SHGs working in rural areas. There is also a possibility of providing some kind of microinsurance to holders of the General Credit Cards, on the lines of the personal accident insurance cover available to Kisan Credit Card holders.

Financial education

One of the major hindrances in the way of delivery of financial services to the poor is the lack of basic knowledge and lack of awareness of the products and services available. In fact, education is a great facilitator. The delivery of financial education would include (i) increasing knowledge of financial matters, (ii) developing understanding of financial products and (iii) building skills in financial management

One of the pioneers in promoting the concept of financial inclusion, the United Kingdom, has established a Financial Inclusion Task Force, which has emphasized 'access to free face-to-face money advice' as an important component of financial inclusion, apart from access to banking and access to affordable credit. A Financial Inclusion Fund has also been established there to promote financial inclusion.

Poverty is a well-known problem in most developing countries. But what is needed is development of mechanisms that ensure that poverty is not exacerbated by lack of access to financial services. People need information and advice when they get into debt. Such information and guidance can best be delivered by appropriate mechanisms and if such effective mechanisms are put in place, they in turn would reinforce the demand for credit.

Some banks have on their own take steps to provide such education, as in the case of the Debt Counselling Cells recently set up by some banks. However, any large scale delivery of financial education has to leverage on the presence of other agencies, such as private entities, non-governmental organizations, civil society organizations, outlets of the corporate sector etc., apart from Government initiatives. The use of information technology (IT) offers a lot of promise in providing financial literacy and education and experience in several parts of the country through the use of kiosks, mobile vans, etc. has shown to what extent IT can be leveraged to provide information on various products and services, production processes and markets for the products. While provision of connectivity for facilitating communication services in rural areas is still an issue, recent developments in wireless technology holds out a lot of promise for evolving an IT-based information dissemination system.

Mode of delivery of services

For the financial sector, the mode of delivery of services is as important as the nature of services to be delivered, as it has several implications for the institutions. It is generally agreed that any delivery of financial services should take into account the issues associated with (i) outreach, (ii) impact and (iii) sustainability of the programme.

Outreach

In India, we have developed a vast network of the banking system in the rural sector and this has prompted us to adopt a bank-centric approach in the delivery of financial services, be it through targeted lending to priority sector and weaker sections, Government-sponsored poverty alleviation programmes or linkage of Self Help Groups, in every aspect leveraging the reach of the banking system in the country.

However, it is also true that one of the major factors affecting this outreach is the cost of expanding the branch network and increasing the number of people manning a branch. The relatively high transaction cost of dealing with a number of small accounts also negatively impacts further expansion. When the focus is only on cost reduction and profit maximization, banks naturally shy away from areas and activities, which are cost-intensive, low yielding and fraught with uncertainties. In such a scenario, it becomes difficult for banks to cover more and more customers located in far-flung areas all by themselves. Hence, there is a need for alternative models of delivery.

Alternative model - Use of intermediaries

On the basis of recommendations made by an Internal Group of Reserve Bank of India on Rural Credit and Micro Finance (Khan Committee), banks have been permitted in January 2006 to use intermediaries such as Non-Governmental Organisations/ Self Help Groups (NGOs/ SHGs), Micro Finance Institutions (MFIs), other Civil Society Organisations (CSOs) and private entities including outlets of the corporates in the rural sector in providing banking and financial services through the use of 'Business Facilitators' and 'Business Correspondents'. This can lead to provision of services and products – savings, credit, insurance - at the doorstep of the customer in both rural and urban areas.

Advantages of the alternative model

Choice of intermediaries

While the NGOs/ MFIs and various other formal and informal organizations would be the automatic choice of banks for appointment as Business Facilitator/ Correspondents, other private agencies working in the rural sector can be used for the purpose. This could include the kiosks, e-choupals and the retail chains being established in rural areas by several corporates. The regulations also permit individuals to be appointed as 'Business Facilitators', who would provide support services without handling cash.

Cost issues

This is the most important advantage of this model. The use of intermediaries in services delivery through the Business Facilitaror/ Correspondent models can help banks in reducing their cost. Studies have shown that the all-inclusive cost of delivery of small amounts of loans up to Rs 25,000 directly by banks comes to above 20 per cent of the loan amount and the cost would be proportionately higher in the case of smaller loan amounts. In one study reported by the Institute for Financial Management and Research (IFMR), Chennai, it is observed that the intermediary (here an MFI) has the cost advantage in delivery of small value loans – while the cost for banks for loans up to Rs 10,000 is reported as 33.1 per cent, that for the MFI is 22.7 per cent. A bank can, therefore, address the cost issue to certain extent if it provides the service through an intermediary in the form of Business Facilitator or Correspondent. Of course, the actual costs would depend on the nature of the intermediary, its efficiency of operations and the methodology adopted by it to reach out to the customers.

Harnessing local knowledge

The banking sector, which has a problem in expanding its outreach beyond a certain point, now has the opportunity to take the advantage of the local knowledge of these persons/ agencies in providing financial services in hitherto unreached remote areas. They can support institutions and organisations that can deliver real services as also conceive and implement capacity building initiatives.

Technology in intermediation

Many of the NGOs/ other intermediaries are quite technology savvy and use various products to reduce cost of operations. Partnership with these organizations would provide the banks an opportunity to look at technology-based solutions and low cost delivery mechanisms that will reduce transaction cost of such services with the volumes required to make such a model sustainable. Use of IT-enabled products and services at the bank and the intermediary level (in the form of simputers, personal digital assistants etc.) have proved to be useful in providing low-cost intermediation, at the same time addressing the issues of speedy accounting of the transactions at the bank level.

Other issues

While the amount of compensation to be paid to the intermediaries by the banks would vary from case to case and also would depend on the nature of service provided, there is a need for uniformity in the method of application of compensations to avoid any problems in future as also to clearly address the issue of costs to the customer.

Most of the innovations in financial services have taken place as a response to customer perception of cost and margin factors and risk management. In catering to the poor, banks may have to look for composite products including both savings and loans components and having appropriate linkage with insurance so as to make it a package.

Impact

Any policy or programme for delivering financial support services to the poor aims at improving their standard of living and helping them to cross the poverty barrier. The impact of such programmes has to be judged with reference to its success in this regard, achieved through asset creation with credit combined with appropriate hand-holding and linkage facilities. In this, the role of domain-specific knowledge providers such as extension agencies in the farm sector, technical training institutes in the non-farm sector and rural development and self employment training institutes set up by many banks, is important, as proper utilization of credit is possible only with a sound knowledge of viable practices and alternatives available at the ground level.

Sustainability

Any economic activity undertaken with the help of credit has to be self-sustaining. Further, the institutions providing these credit facilities should also be able to sustain their activities. This needs appropriate designing and pricing of the products and appropriate delivery methods which should, inter alia, address the cost issues, as any outreach expansion and provision of financial services to the poor has cost implications for the institutions.

Local level banking institutions

The Regional Rural Banks (RRBs) which are currently undergoing a process of consolidation aimed at improving their operational viability, are among the most suited institutions to bring about financial inclusion in the rural sector, as they have a wide network of branches spread over far-flung areas of the country and have over the years acquired the expertise in dealing with the people of small means. It is with this objective that the Reserve Bank had specifically advised RRBs in December 2005 to offer small overdraft facilities in the no-frills accounts. While several issues need to be addressed in strengthening this sector, it is no doubt that an appropriately constructed model with the RRBs at the center stage will go a long way in furthering linkage with the disadvantaged and provide financial inclusion.

Similarly, there are several cooperative banks which are running well and several primary cooperative societies (PACS) in the country which are functional. They provide additional outlets for the banking sector. Wherever such banks/ societies exist, they can be identified and entrusted with the job of providing saving/ credit facilities to the financially excluded people. There may be a case for these local level banking institutions acting as intermediaries for larger commercial banks, in a manner that will lead to a win-win situation for both.

Special needs of disadvantaged areas

In a move to speed up financial inclusion in the North-Eastern Region of the country, the Committee on Financial Sector Plan for North-Eastern Region (Chairperson: Smt. Usha Thorat, Deputy Governor, RBI) in its report submitted in July 2006, has recommended that the commercial banks should prepare a roadmap so that the branches in this region can give banking access to 50 new households every month for the next four years with a deposit account, with option to the households of opening such accounts as “no frills” accounts. The report has emphasized that the focus should be on proactively connecting banks to the people, rather than waiting for walk-in-customers and has underlined the need for adequate publicity with a view to promoting financial literacy among the people. The suggestions would merit application elsewhere also.

Conclusion

In fact, there is a need for banks to redesign their business strategies to incorporate specific plans to promote financial inclusion of the low-income groups treating it not only as a corporate social responsibility, but also as a business opportunity. The business opportunity lies in exploiting the low margins-high volumes situation at the 'bottom of the pyramid' and seen in this context, financial inclusion would not only be socially desirable, but also would make a lot of economic sense. To quote noted economist Prof. C.H. Hanumantha Rao, "Considering the prevailing socio-economic structure and the nature of our polity, the challenges for achieving more inclusive growth are much greater than for stepping up the GDP growth rate". Financial inclusion opens the possibilities of other types of inclusion and coupled with appropriate policies, has the potential to lead to overall inclusive growth of the society.

Prepared by Shri R. N. DASH Deputy General Manager & Member of Faculty in the College of Agricultural Banking (CAB), Reserve Bank of India, Pune. The views expressed in this article are personal.

The policy assumptions for reaching the rural poor in developing countries have led to establishment of formal and specialised supply-oriented rural financial institutions, with donor support, on many occasions. It is now well documented that the rural financial institutions have not been effective enough in delivering the policy objective (Adams. Graham and Von Pischke 1982: Von Pischke and Rouse 1983). The inability of the rural financial institutions has led to search for alternative modes of delivering credit. The popular alternative that emerged as part of the searching process was the “informal group” approach which came to be known as Self-help Groups (SHGs) with emphasis on savings mobilization, followed by credit.

2. A review of the working of SHG's innovative approaches to saving mobilization and lending has, under APRACA auspices, contributed to establishing and developing links between SHGs and the formal rural financial system with a view to supplementing the resource base of SHGs as well as improving the outreach.

3. The experiment launched in India by NABARD in 1992 regarding linking SHGs with the banking system is now more than 14 year old. The pilot stage continued upto 1995. In 1996 the RBI issued circular making the SHG-Bank Linkage programme a main-stream activity for expanding outreach and promoting inclusion of the disadvantaged into the formal financial system. During the experimentation stage, i.e. upto March 1995, 2122 SHGs had been covered under the linkage programme. Loans sanctioned by the banks in favour of the SHGs aggregated to Rs.244.49 lakhs against which NABARD provided refinance amounting to Rs.229.34 lakhs. 16 commercial banks and 12 RRBs were involved in the linkage project. A major proportion of SHGs linked under the programme has been in the States of Karnataka, Kerala, Orissa, Andhra Pradesh and Tamil Nadu. Some of the important findings from a few quick studies and impressionistic assessments on the linkage programme show that -

There was variation in the characteristics of SHGs in respect of formation, size of the group, intra-group and inter-group relationships.

The members of SHGs generally belonged to the poorer sections of the rural society with most groups having been formed exclusively for poor women.

The level of savings shows wide variations both across groups within a State as well as across the States.

The loaning by group to members was flexible and different norms prevailed amongst different groups such as fixed loan ceilings, differentiated by purpose, resource availability etc.

Financing has been done by the groups for a wide variety of micro enterprises in addition to meeting consumption needs.

In respect of repayment, the consideration was the total income derived by a family of the member from all sources and fixing as shorter a period for repayment as possible which has invariably been than being given by the banks.

Some NGOs retained some margin while they onlent to SHGs while a few other NGOs took no margin.

Repayment performance has been almost bordering on 100% of demand.

The income per member had increased substantially alongwith social cohesiveness in addition to eliminating dependence on moneylenders and crating community assets.

4. A similar study done on the project 'Linking Banks and SHGs in Indonesia' (PHBK) started in 1988 as a pilot project also shows encouraging results (Eckert Koch and Sri Mulyentini Soetijibto. 1993). While the Indian study referred to above does not, surprisingly, indicate the extent of savings mobilised by the 2122 SHGs, the Indonesian Study indicates that more than 700 groups had deposited savings of around 1 billion Indonesian rupee. The pilot phase covered the period 1988-1992. One of the significant observations was that more than 2/3rd of the groups have been in existence for more than 5 years with an average size of 79 members. The average repayment rate stood at 92%. Other findings of the study were : (i) approximately 40% of the direct loan recipients were women; (ii) agriculture was the major source of income for 52% of the group members followed by trade (29%) and industry / handicraft (11%) ; (iii) the major common factor for the cohesiveness of group was the same living area (85%); other factors included social activities (43%), economic activity (42%); (iv) 86% of all SHGs mobilised internal savings before they received PHBK loans; (v) average effective rate of interest was 48% p.a.; (vi) average repayment period was 10 month; (vii) cases of arrears in loan repayment from member to SHG were existing in almost two-thirds of SHGs; (viii) 33% of SHGs had collection rate of 100%; (ix) joint liability in various forms was practised by 46% of the groups.

The post-experimentation stage achieved substantial growth in the programme as revealed in the following table:

SHG-BANK LINKAGE PROGRAMMEPERFORMANCE AS ON 31 MARCH 2006

Sl.No.

Particulars

Cumulative as on31 MARCH 2006

No. of SHGs linked

2,238,565

% of women groups

90

No. of participating banks

545

Commercial Banks

47

egional Rural Banks

158

Co-operative Banks

340

Bank Branches participating

44,362

No. of States/UTs

31

No. of districts covered

583

No. of Partners

4896

Bank Loan Rs. in billion

113.98

Refinance Rs. in billion

41.60

No. of poor households assisted (in million)

32.98

Average Loan/SHG Rs.

50,917

Model Wise Linkage (Cumulative)(%)

SHGs formed and financed by Banks

20

SHGs formed by other agencies but directly financed by banks

74

SHGs financed by banks using financial intermediaries

6

The pilot programme has developed into an comprecedented movement. It has evolved as the most promising tool for social and financial inclusion.

Subsequent studies also confirm the conclusions of earlier studies. Some of the findings of the recent studies are given below :

5. The findings of NABARD as well as the Indonesia study indicate that access to the rural poor through the SHG route is very encouraging. The SHG mode of delivery has also been successful in terms of financial self sustainability (Jacob Yaron, 1994) on the parameters of (a) positive on lending interest rates (b) high rate of loan collection (c) high effective savings (deposit) rates containing administrative costs through efficient procedures. However, in respect of the other equally important measure viz. outreach, in terms of value and number of loans extended, savings accounts, type of financial services offered; percentage of total rural population served and participation of women, the performance of SHGs has been noteworthy in respect of serving the rural women only.

Amidst the euphoria of success, same criticisms and issues have also surfaced. The per capita loan outstanding has remained low (below Rs.4000) in most cases. Though the linkage programme is showing signs of growth in hitherto deficit northern and north eastern states, the predominance continues in the southern states. There are no visible signs of major improvement in economic activities, being taken up by every 5 to 7 year old groups. Some studies have also suggested that the groups tend to become single caste groups in the name of homogeneity and expulsion of defaulting members are noticed so as to maintain the image of high repayments. There are also criticisms that some bankers, under pressure to achieve linkage targets, promise the availability of credit at the time of formation of groups.

It is important to closely look at these criticisms, as the quality of the groups and adherence to basic concepts are fundamental to the success of the largest microfinance led social and financial inclusion initiative in the world.

The Next Stage

6. The question that arises at this point relates to the next stage of the development of SHG viz. sustainability of the existing groups in addition to expanding the outreach in terms of area as well as members. While considering these issues, the limits to informal financial intermediation should also be kept in mind. The limitations include increasing default risks, the limited number of people capable of making large contributions and the preference of these people for wider and more flexible range of services offered by the formal banking system (Garry Christensen, 1993).

7. In the States where SHGs have established their presence (AP, Karnataka, Orissa, Tamil Nadu, Kerala) several measures as outlined below can be considered for expanding and sustaining them :

(a) Improving resource base

As the SHGs mature and become competent lenders, mobilisation of resources on a larger scale than before becomes necessary. For the purpose, they may have to go beyond loan resources being made available at present. At this stage, for mature SHGs, keeping in view the track record, it can be considered whether market oriented savings instruments can be offered by SHGs to the public i.e. non-members. The entity that can accept deposits can be SHG itself or federation of SHGs or the NGO itself. A case in point is the example of Prodem, a voluntary organisation in Bolivia, which has been taking initiatives in setting up a micro enterprises bank, Banco Sol, while enabling the SHG system to accept deposits. With the savings mobilisation from public added to SHGs, it would be noted that SHG would be graduating towards full financial intermediation and infusing real competition within rural credit system. The existing regulatory framework in such an event needs to be suitably restructured for creating a favourable policy environment for further development of SHGs. Study in Malawi (Chipeta and Mkandwire, 1989) reports that savings and deposits mobilised by an urban SHG at high real rates of interest are profitably re-lent to members.

(b) Operational "takeover"

Enhance the ability of existing SHGs to "takeover" the Primary Agricultural Credit Societies (PACS) operating in their vicinity. This is particularly so against the fact that majority of the PACS are dormant. Given the fact that SHG is the informal face of co-operatives, albeit on a lesser scale, this proposition needs to be experimented. The rebuilding of the credit cooperative structure has been witness to many experiments that have not yielded results. The raison d'etre of SHGs is co-operative thrift. A model has been suggested towards redesigning the credit co-operative structure (Tushaar Shah, 1995) in which the concepts of ‘member centrality of goals, patronage cohesiveness, governance effectiveness and operative credit structure’ are emphasised for the success of the cooperative credit structures. The SHG scores very high on all the 4 parameters.

A concrete starting point, for example, can be identification of PACS under which one or two villages are being covered. The members of SHGs functioning in these villages can join the PACS as its members and effectively try to take over the management. Here the question of numerical weightage may come up in terms of the existing members of PACS who may out-number the members of SHGs. In such an event, the only impact SHG members could have on the management of PACS is to create an effective pressure group within the PACS. In another scenario, where the SHG members out-number the existing members of PACS, the management can effectively be taken over by the SHGs. The third scenario which may be representative in the overall Indian context may be PACS having become dormant by virtue of large scale defaulting members, the members of SHGs can act as social pressure groups for the purpose of ensuring repayment of the outstandings by the defaulting members and try to revive the PACS.

The experimentation that has been done over the decades in rural financial intermediation has been limited to creating new institutions with lending in focus which have turned out to be failures. While considering the next stage in SHG development, such pitfalls of earlier experimentations have to be avoided. The objective is infusing the spirit of normal rural financial intermediation being done by SHGs into the PACS by adopting synergy approach i.e. grouping the SHGs within the operational area of the PACS for the purpose of its operational takeover. The reforms in cooperative law as indicated in the Brahma Prakash Model Cooperative Law and also the efforts of some of the State governments going even beyond the model bill in granting autonomy to the cooperative credit movement (for example, Andhra Pradesh) would auger well for such integration of SHG with the formal grassroot organisations. While doing so, the original spirit of SHGs viz. homogeneity, limited number of members, democratic spirit, etc. have to remain undisturbed.

(C) Reverse the linkage

At present SHGs are linked to banks for supplementing resources while the banks have externalised some of their functions onto SHG. This can be formalised and improved upon by SHGs performing "agency activities" on behalf of the branch in clearly specified geographical area, say one or two villages within the Service Area of a branch. Deposit mobilisation and lending could be done by SHG on behalf of the branch; with only monitoring responsibility remaining with the bank. The role of Commercial Banks and RRBs in this respect, assisted by NABARD and RBI, may include surrendering gradually the functions being performed at the branch to the SHG or Federation of SHGs with monitoring being done from the branch/ head office of the RRB/ Regional Office of the Commercial Bank.

8. In areas where NGOs have not been able to create SHGs or where SHGs on their own have not been in existence or NGOs are not in existence, branches of commercial banks, RRBs and cooperatives have to take initiative under the "direct linkage model". Another alternative is to deformalise co-operative credit system at the grassroot level.

Not withstanding the present winds of change sweeping, the economic scenario whereunder the role of the State is expected to be reduced substantially, there is need at this stage for developmental intervention by the formal governance systems at the State level to take initiative towards propagating the concept of SHGs through various media that are available to it. For the purpose, there is need on the part of NABARD to energise the State Governments by way of exposure to top level political and non-political decision makers about the impact of SHGs in areas where the development is at an advanced stage. Thus, NABARD has to play the role of an extension agent for the purpose of ensuring crystallization and expansion of impulses generated by the SHGs movement. A caveat would be in order here. It is to be clearly understood by the State Governments and all other stake holders that the basic conceptual foundation viz. volunteerism, homogeneity, spontaneity, size, first priority to savings and democratic spirit of the SHGs cannot be violated under any circumstances.

It is late evening in a small village of Southern India, when a group of 15 poor villagers, after the day's labour and some rest, has gathered at a place. One by one, each of them hands over two Rupees to a co-member, who is comparatively more literate and jots down the names and the amount received as he collects the money. Then, the group discusses about their problems of their vocation, health, education, etc. Thereafter they discuss certain proposals for loan from a few members. One woman member requests the group for a loan of Rs. 800 for the treatment of her sick child. Another person wants Rs. 1500 for paying to mulberry planter for purchase of mulberry leaves to feed the silkworms. The third one wants about Rs. 2000 for repairing his house. The fourth demand its for Rs. 4000 for doing some small business. The fifth request is for Rs. 1000 for purchase of seeds, manure, etc.

Then follows some lively and probing discussion among the members about the credit-worthiness need and requirement of the exact amount, the possibility of income and repayment, priorities, etc., to arrive at some practical and at the same time humane decisions. The process seems easier as they are aware of each other's problems, needs and capabilities. The first preference is given to the lady for treatment of her child. The loan is granted at an interest rate of 1% per month. The second preference is for purchase of mulberry leaves so that the silkworms would not die. However, the loan amount is reduced to Rs. 750/- and the rate of interest is 2% per month, and the group members decide to persuade the supplier of mulberry to accept the money in two installments. Third is for purchase of seeds and manure agreeing for Rs. 600 at 2.5% interest rate. For the fourth demand, immediately an amount of Rs. 1000 is agreed to be given for urgent repairs at 3% interest rate and for the remaining amount he is asked to wait for a few weeks. And for the fifth request for business purposes, the decision is deferred to the next meeting when more funds will be available.

A similar meeting of another group comprising all women launder members is in progress at another village. The group members have been immediately benefited by the establishment of the group. They have created certain convenient common washing places, arranged for bulk purchase of soaps, detergents, etc., at discounted rates. Further, earlier they were washing uniform clothes of a factory through an intermediary, who was paying them Rs. 0.80 per piece. When the Group was formed, the members with the help of the promoting Non-Governmental Organisation (NGO) negotiated with the factory and got a rate of Rs. 1.30 per piece. Now, the women members are discussing about their interests in taking up certain other economic activities in addition to their traditional washing business. They are also enthused about the education of their children.

In yet another meeting of a women group at the same village, a member complains that her husband has sold away the asset, i.e., a goat procured with the loan assistance from the group, to a local butcher. The members immediately go to the butcher's place and pressurize him to release the goat as it belongs to the group.

Another heart rending episode is going on at a remote village in Rajasthan, in northern India. A women member is pleading for a loan so that she could use it to get her son released from the clutches of the moneylender, from whom an amount Rs. 5000/- was borrowed for the marriage of her very son, who had to become a bonded labourer to the moneylender in consideration of the interest towards the loan. Moved by her pathetic situation, the group agrees to give her a loan in two instalments for terminating the bondage. The woman expresses her gratitude by assuring that she would make the repayment within a period of two years with the help of her small income from agriculture and also casual labour work to be put in by her, her son and her daughter-in- law. The other members could see the sense of relief and smile on her face after a long time.

Though a little lengthy, these actual scenes have been narrated to make the readers understand and appreciate the system of mutual help known as Self-Help Group (SHG) approach, a concept which is gaining momentum in many parts of the world for helping the poor. The groups, comprise very poor people, who by themselves rarely get any loan from the banks or subsidy from the governments. The SHGs have generally been promoted by the NGOs/ Voluntary Agencies. In a few cases, the groups have been formed by the villagers themselves.

Emergence of Self-Help Groups for banking with the poor

It has been recognized that the SHGs are a traditional response to the economic marginalization all over the world. In many third world countries, including India, despite the commendable efforts put in by the credit institutions, a large section of the poor population has still not got access to the credit from the formal banking system and depends upon conventional private sources like money lenders, village shopkeepers, etc., for their credit needs. Even though the governments have also undertaken various poverty alleviation programmes, as revealed by various studies, as substantial portion of the very poor and the most vulnerable sections of the society has continued to remain out of the realms of such programmes. They have remained poor and backward, economically as well as socially. They consist of marginal farmers, petty rural artisans, agricultural labourers, etc., mostly belonging to socially and economically backward strata of the village population and are vulnerable to personal as well as natural calamities. The illiteracy of these poor people further compound their problems.

Besides, there is also a problem of magnitude of the borrowers, particularly in South-East Asian countries where the demand for credit both for farm and non-farm activities from the small farmers has increased substantially. For example, by the turn of the century India may have around 200 million rural/ semi-urban small borrowers. It may not be possible for any formal banking system to effectively and directly cater to do so many small borrowers. Further, in many countries, including India, the recycling of funds has suffered on account of the generally poor recoveries of rural loans. Actually, the recoveries from the poor are generally regarded as much better than from the better off borrowers. The non-repayment by the poor has been primarily on account of wrong government policies, populist, political decisions vitiating the general atmosphere of recovery, etc. Besides, there could be several other factors which appear to have restricted the access of the rural poor to formal institutional credit. Some of these are:

(A) From the angle of the poor

Due to their social, economic and educational backwardness and being unorganized they are unaware of various programmes of and facilities available from the Government and banks and are generally deprived of access to such benefits.

They have an apprehension that the banks are not meant for poor people like them and they would not be able to get loans from the banks.

Lack of security to avail bank loan.

Documentation procedures, rigid lending policies and norms of the banks generally make the poor ineligible for bank credit.

Funds requirement for consumption, social and even production purposes, though small, are generally emergent. The uncertainty and long delays in obtaining such loans from the banks discourage them to approach the banks.

In some cases, past unpleasant experience of the poor with the banks and government agencies is also a discouraging factor.

(B) From the angle of banks

General mental reservation about financing such poor borrowers mainly due to the fear of bad debts.

Lack of security to back such loans.

Non-compliance of documentation and other formalities by the borrowers.

Non-conformity with the usual banking norms.

Low returns to the bank on account of lower rate of interest to be charged on such small loans in accordance with the regulations of the central bank/ government.

Servicing large number of small loans with frequent transactions spread over a vast area is unwieldy besides involving high cost, making it inconvenient and apparently uneconomic for the banks. One would not be surprised if in the name of the market orientation and total freedom to lend, such small poor borrowers are the likely casualty and left high and dry.

The result of all this is that the vast section of poor population continues to be outside the fold of banking system despite the best efforts by all.

The concept of SHGs helps resolving this situation. Through the basic philosophy behind cooperatives is also more or less the same as that of SHGs, in many countries a large number of cooperatives have not been performing their role effectively, particularly in helping the poor due to several factors. The size of the agricultural credit cooperative societies is generally too unwieldy; the membership composition of them being mostly heterogeneous the richer and dominant sections try to corner all the benefits depriving the backward and the poor; and cooperatives are too much politicized and they do not have freedom to function because of various regulations and stipulations from the central banks and the Governments.

Characteristics of SHGs

The SHGs have been found as an effective and economic means of ensuring access of credit to the poor and vulnerable sections of the society, as the transaction cost is much less and because of the constant and effective supervision the loan is properly utilized and the repayments are prompt. SHGs are however, not regarded as a substitute for the existing banking arrangements where the banks are giving loans directly to the people. They are to be regarded as a support system to the existing banking operations.

The objectives of the SHGs, to reiterate in brief, include inculcating the habit of thrift, savings, banking culture, i.e., availing loan and repaying the same over a given period of time and in the process gain economic prosperity through credit.

The SHGs also provide scope for collective management of funds and develop, inter alia, the entrepreneurial ability, which is difficult if undertaken by individual member, more particularly in case of a common activity undertaken jointly by many.

The membership composition shall have homogeneity in terms of socio-economic status or common economic activity and people having almost similar problems and needs, to have cohesiveness and collective approach.

Lending procedures adopted by the Groups are very simple and loans are provided on the basis of the combined wisdom and mutual trust. The joint participative appraisal as well as the decisions of the Group have not only been found to be practical but also humane and beneficial to the members and banks. The utilization and repayments of the loans are generally excellent. The interest rates charged many vary from purpose to purpose as also depending upon the joint decision of the group and are higher as compared to the formal credit system. The borrowers are willing to bear the same as this is still fare less than the moneylender's interest rate and the interest collected goes to augmenting the resources of the group itself and at the same time the loan is available at short notice. The lending norms like unit cost, repayment period, etc., are in no way comparable with those generally stipulated by the banks. Initially, the credit provided to the members is mainly for consumption purpose like food, health, social functions, etc. With the passage of time and increase in resources, there could be shift towards the production needs such as crop loan, purchase of milch animals, sheep, goat, silkworm rearing, etc. The SHGs, however, find it difficult to meet the increased requirements of the members for economic activities for want of adequate funds. At this state, it is felt that banks could come forward to give loan to the SHGs to augment their funds.

The SHGs are also helping in inculcating good habits and ethics among the members. The drinking/smoking habits amongst the members are discouraged. Even the behaviors of the members may come up for discussion during the meeting of the groups, thus introducing a moral vigil on the members. Propagating literacy is also indirectly being taken care of by some groups, who insist on their members to at least learn to sign instead of putting thumb impressions to be eligible for a loan. A sense of discipline is also inculcated by imposing fines on late coming/absenting members.

Formation of SHGs and linking them with banks

Having found SHGs as an effective and economical approach for disbursement of credit to the poor and recovering loans at a reduced transaction cost, there is need to link the SHGs with the willing banks. This will be in addition to the direct lending to the individual borrowers of the target group as also through the existing vast network of cooperatives. It is often suggested that the banks can deal directly with the SHGs instead of dealing through/taking the help of NGOs in the process of formations of groups and linkages with the banks. While it may be ideal and theoretically feasible also, in practice, however, it is difficult to assume the commercial banks' large scale involvement in organizing the groups and sustaining them on a long term basis. Moreover, it would depend upon particular person who is posted in a particular branch and with the change in the incumbency, the interest in the groups may also get affected. The entire process may get a serious set bank thereafter. Besides, the commercial banks are generally not oriented to such a type of social banking and do not possess the expertise for organizing the groups which requires lot of insight into the socio-economic and demographic study of the people. NGOs are much better equipped for such purposes. However, once the groups have established their credibility and work as some sort of a voluntary agency for the members in the area, the NGOs can shift to other areas, leaving a direct linkage between the banks and SHGs.

The Four-in-one role of SHGs

A money lender : Providing quickly small emergent loans, but without charging exploitative rate of interest;

A development bank : Providing small production and investment credit to the poor for their economic upliftment, but without going through the long procedures, documentation, security requirements, etc., and at lesser transaction cost;

A cooperative : Following participative approach of mutual cooperation and joint pressure, without the ills of selfish interest, interference of the big brothers/Government department officials, etc., and with a lot of flexibility; and

A voluntary agency : Helping each other through their common efforts for bringing economic and social upliftment amount the poor people.

The following stages are suggested for formation of the SHGs and linking them with the banks/activity.

NGOs/ voluntary agencies to organize small groups of 10 to 20 poor people, based on homogeneous socio-economic factors.

Through regular savings of the members, SHGs should build up their fund, to be supplemented by some contributions from the NGOs wherever possible, as also out of the income of interest of loans and common activities.

NGO should train the SHG members for maintaining the accounts on savings, lending and repayments as also for finding solution to their common problems.

SHG should start lending operations out of the group funds to their members. Initially it will be mainly for emergent consumption, health and social needs. Subsequently small production needs can also be met depending upon the position of resources.

At this stage, when the groups require more funds for meeting the needs of the members for undertaking economic activities the banks should enter the field, interact with the group, assess its fund requirement, decide about the credibility of the group and its members and give loans to the SHGs, for adding to the corpus funds. The amounts, which are generally small in the beginning, may be increased as the confidence and trust develops between the bank and the group. While the bank will charge the usual rate of interest, the group will in turn be free to charge to the members and rate of interest it thinks reasonable based on the joint decision of the members. It generally varies from 12% to 36%. The margin in the interest rates adds to the income of the group and goes to its corpus fund. The repayment will be made by the group to the bank as per as the agreed terms. From members to the group, the repayments will generally be faster. There will be no collateral security. The main documents of loan will be signed by authorized group leaders. However, if required by the bank, a jointly signed document may also be obtained from all group members, if necessary, indicating some sort of mutual guarantee and responsibility for repayments.

Under special circumstances, in case of difficult areas where banks branch network is poor and/or the banks branch network is poor and/or the banks do not have confidence in lending to SHGs or for some reasons. SHGs are reluctant to borrow from the banks, the banks may consider providing bulk finance to the NGO who in turn may pass on to SHG, retaining some margin, if necessary.

After some time for larger investment and production needs of the individual members, the banks may consider giving loans directly to the members on the specific recommendation of the group. The loan amount as well as the repayments may be routed through the groups in this case also.

RECOVERY PERFORMANCE

Rs. in 000

Sr.No.

Particulars

Demand (Current)

Collection

Balance

% of recovery

1.

Case level Direct Lending

Lending through SHGs

3280

902

1395

783

1885

119

42.53

86.80

2.

Selected case SHG village level

Non-group beneficiaries

SHG beneficiaries

66

26

25

24

41

2

37.88

92.30

In course of time when the credibility of the group and its members is established and banks are satisfied, and also the members develop confidence to manage their affairs, the NGO can slowly withdraw and move to other uncovered pockets. The banks in that case will deal directly with the SHGs and their members.

In the process of financing SHGs banks and NGOs should take care that (a) money/ credit should not be made available in abundance – it should be scarce and flow should increase gradually; (b) savings by members should be a must before credit flows; and (c) group to be eligible for loan should have existed for sometimes, say six months to one year, by which time it should have learnt the process of saving, loaning repayments, accounts maintenance, mutual help and group pressure, etc.

Experience of loaning through SHGs

The author has conducted a case study on Indian experience in financing SHGs by banks. On selective basis, banks have given loans either through SHGs or to the SHGs for poor beneficiaries. The experience has shown that recovery in the case of bank loans through SHGs were above 90% as compared to the direct lending where recovery was about 50%.

Further, it was also observed that the transaction cost of the bank was reduced by about one third when the lending was done through the SHGs.

COST OF LENDING PER ACCOUNT

(In rupees)

Sr.No.

Particulars

SHG members

Non Self Help Group members

1.

Salary and Allowance and travel expenses

83

135

2.

Establishment expenses

8

8

3.

Other expenses

14

14

Total

105

157

The transaction cost may further reduce if the loans are disbursed to the SHGs as indicated about as it will required maintaining and servicing a single account. The reduction in the transaction cost is mainly on account of reduced visits for appraisal, follow up and recoveries. The reasons for better repayments in case of loan to or through SHGs are :

Quick, easy and realistic appraisal of the loan activity and the borrower by the groups;

flexibility of lending procedures and norms and quick availability of loans;

effective follow up on the part of group members leading to proper utilization of loan;

group pressure and social stigma as also fear of expulsion from the group and deprivation of future benefits; etc.

Sum-up

Based on the conditions prevailing in many less developed countries in regard to the credit availability to the poor it is apparent that the banks can play a crucial role in the process of economic upliftment of the poor by accepting concept of SHGs for providing credit to the poor and vulnerable

This handout has been preserved as it furnishes an account of the early days of the SHG-Bank Linkage Programme. The author, who was a senior officer of NABARD, was closely associated with the programme.

At the Conference of Regional Heads of the Rural Planning & Credit Department (RPCD), Reserve Bank of India held at the Central Office on November 24, 2005, the College of Agricultural Banking (CAB) was advised to conduct a study on "Costs and Margins of Micro Finance Institutions (MFIs)".

Background

2. Micro Finance Institutions (MFIs) have emerged as important players in the rural credit delivery system. They are at present in significant numbers in the states of Andhra Pradesh, Tamil Nadu, Karnataka and Uttar Pradesh. MFIs can take many forms, but can be broadly grouped into the following categories: -

3. As per the current interest rate policy of the Reserve Bank, the interest rate applicable to loans given by banks to micro-credit institutions or by the micro-credit institutions to Self Help Groups/member beneficiaries would be left to their discretion. The interest rate ceiling applicable to direct small loans given by banks to individual borrowers, however, continues. As regards MFIs, there is also no specific restriction on 'other charges' levied by them on their borrowers. However, complaints have been raised from time to time on the 'high' interest rate and other charges levied by the MFIs. The contention of the MFIs has been that since they provide small quantum of loan to a large number of people, the cost of delivery and servicing are significantly high and need to be loaded on the borrower, if the lending is to be sustainable. In the process, the ultimate burden to the borrower is higher than what he would have paid if he had accessed credit directly from the banking system. At the same time, the argument is that banks do not have the infrastructure and systems to service such clientele requiring small loans with near daily contact. Further, MFIs provide service at the borrower's doorstep, which saves the borrower travel costs and lost wages. The higher interest rate and charges levied by MFIs need to be viewed in this perspective as well as in the context of very high interest rates charged by the informal lenders on whom still a large segment of rural poor depends in the absence of effective linkage with the formal credit delivery system.

4. The issue, therefore, is to understand the cost involved in such a delivery system with specialized functions, small volumes and appropriate infrastructure, manpower, mobility, cash movement, information system, back office support systems, etc. and to compare these with the charges being levied by these institutions to their clients.

There are three sets of ideas: (1) Evolution and development is 'Adaptive Change' rather than progress; solutions to one problem generally sow the seeds of another set of problems. Hence, constant process of adaptations. (2) Dependency of any system on the flow of information, especially about the differences between ideal and the actual, between intended and the actual outcome and also to react to new information in a timely manner. (3) Different groups of people have different perception of reality; although it does not imply one being right and another being wrong yet they are necessarily incomplete and imperfect. Taken together, these three sets of ideas contribute to a development paradigm in a changing world.

There is need for a technology that can be adapted to solve local problems to engender constant feedback from existing rural situations and to take advantage of a larger knowledge base. For this purpose, the decision makers, especially those who are involved in development process, need constant flow of information that is relevant, timely, accurate and usable. Moreover, it should be obtained at reasonable cost.

"The prosperity after harvest of a small farmer on a project besides a main road close to a capital city may colour the perception of a succession of influential officials and foreigners. The plight of a poor widow starving and sick during the wet season in a remote and inaccessible area may never in any way impinge on the consciousness of anyone outsider her own community and not even all of them." - ROBERT CHAMBERS.

(ii) Long and dirty - It is much longer and more costly, often involving the collection of voluminous data. But some surveys are also clean.

PRA is fairly quick and fairly clean. Its role is to understand and appreciate the knowledge, concerns and priorities of rural inhabitants and to articulate these with those of scientists and other 'Outsiders'.

PRA is a methodology for improving the cost effectiveness, timeliness and quality of rural development related research.

Principles of PRA

i) Optimal ignorance i.e. Not to know what is not worth knowing.

ii) Appropriate imprecision because often only the order of magnitude ordirection of change is used.

iii) Triangulation - To see intentionally different points of view of the same thing. Three major dimensions

(a) Team composition to view the same information from different perspectives (b) Units of observation - non­random selection, stratification, etc. (c) different research methods to improve the quality of information and to cross-check the information e.g. direct observation combined with semi-structured interview.

Exploratory interactive and flexible research - Be ready to abandon old hypothesis and to form new ones to explore whenever needed.

Rapid and progressive learning & Use of indigenous knowledge - Avoid strict sampling, formal questionnaires, massive survey but at the same time do not haste - Listening and learning - Treat villagers as teachers. Off-setting the Biases - Be the unimportant and avoid the best-village­ garland-speeches syndrome. Include women in appraisal team.

Banks today are operating in a highly competitive and rapidly changing environment. In the changing economic scenario, a professional approach to business development is essential and the survival of a banking institution depends on its ability to take up challenges coming up in the environment. Developing business through marketing of bank’s services is one of the crucial areas which need attention of the bankers to ensure profitable survival.

MARKETING : CONCEPTS

The role of marketing in an organisation’s existence and growth need not be overemphasized in today’s competitive environment. According to Peter Drucker, “marketing is so basic that it cannot be considered a separate function”. It is the whole business seen from the point of view of its final result, that is, customer’s point of view. Survival of an organisation depends upon its ability to acquire resources necessary for its sustenance. One of the modes of survival, as observed by Philip Kotler, is “exchange”, whereby an organisation creates and offers goods and services that are able to attract and satisfy the purchasers, in exchange of its value. This option can be gainfully exercised only if the organisation develops the capacity to produce the needed goods and services. The organisations should be geared to identify the customer needs and preferences which are subject to change over a period of time.

One of the policy issues discussed in marketing is the ultimate objective of the marketing efforts of an organisation. The general belief is that the objectives of marketing is to maximise the market’s consumption of your products and services. However, it would be desirable to set the goal at maximising consumer satisfaction, rather than consumption. The organisation, in the long run, is likely to benefit from a customer oriented approach to marketing. The approach, in other words, should ensure strong foundation for the institution’s existence, because the concepts of marketing has its origin on the premise that man is a creature of needs and wants. And there is constant effort on his side to satisfy his needs. Further, his needs and wants keep changing with time, circumstances and the immediate environment in which he is operating. Marketing management essentially involves the efforts to achieve the need satisfaction of the target group the institution is trying to serve.

There are various philosophical aspects which can give conceptual orientation to marketing personnel’s approach. The “selling concept” assumes that the consumers will either not buy or not buy enough of an organisation’s products unless the organisation makes a substantial effort to stimulate their interests in its products. This becomes all the more relevant when the organisations are functioning in a rich environment of competitors. “Product Concept” in marketing philosophy assumes that the consumers will favour those products that offer best quality for the price, while “production concept” assumes that consumers will favour those products which are available and affordable. An organisation’s task, therefore, should be to serve target markets in a way that produces not only want satisfaction, but long-run individual and social benefit as the key to attracting and holding customers.

The need for a well defined institutional framework within the organisation to manage the marketing efforts should be reckoned by any business concern. It is, therefore, essential that the institution constitutes a marketing wing which will take care of the marketing function of the organisation. This compartment has to work smoothly with other segments of the organisation. Acquiring modern marketing orientation requires support from top management, a committed task force, constant review of strategies and a consultant’s help if considered necessary. The marketing wing should be adequately supported by a “Marketing Information System”, which is a critical element in effective marketing. The information system is the channel linking external environment with the executives of the institution.

BANK MARKETING :

Marketing philosophy, in any context, refer to the need satisfaction of the institution’s clients. The basic step involves identifying the needs of the customers and developing products to suit their needs or modifying the existing products accordingly. It also requires the need for foreseeing wants of the customers in future and developing suitable products of their requirement. Deryk Weyer of Barclay’s Bank attempted a comprehensive definition for Bank Marketing. According to him, it consists of identifying the most profitable markets now and in future; assessing the present and future needs of customers; setting business development goals and marketing plans to meet them and managing the various services and promoting them to achieve the plans, all in the context of a changing market environment. Successful marketing in a bank calls for commitment at all levels to the task defined in this regard. Achieving higher business standards and operational performance through marketing of banking services should be one of the directional goals of the organisation.

The Indian banking system, by habit and tradition, considered deposit growth as the business objective and other parameters such as productivity, profitability, customer satisfaction, etc. were considered less important. In view of the competitive surroundings in which a bank is compelled to function, there is need for formulation of a strategic action plan for its marketing efforts. A marketing strategy, in general, is a systematic, appropriate and feasible set of concepts and actions through which the institution strives to achieve its goal of customer satisfaction and profitable survival. Strategy should be designed after taking into account the strengths and weaknesses of the organisation. For example, a bank or branch with clientele from various segments could think of “market penetration” by offering the existing range of services to existing customers. On the other hand, a bank which is having expanding business through new branches or branches which are not facing acute competition could think of “Market Development” by offering the existing services to new customers. However, the real marketing challenges arise from the institution’s capability to design new product range for their customers of various segments. The strategy, therefore, lies in increasing the client base and consolidating the relationship with existing and new clients through existing or newly developed products.

The operational aspects of strategies for marketing contain actions such as development of Relationship Banking, designing of effective delivery system, ensuring customer-oriented services and modifying the system into a personal selling organisation. In western banking, officials assigned the job of personally contacting the customers and offering the services at doorsteps had been able to make a significant impact on the development of business for their organisations. The importance and role of personal selling and customer contacts in the marketing efforts of a banking institution stem from the success of such efforts in many banking institutions all over the world.

The implementation of the strategies is as crucial as its design in ensuring successful marketing. The communication of the adopted strategies to different tiers of the institution and ensuring of its proper understanding by personnel at all levels, is essential for successful implementation of the strategies. The communication becomes difficult in organisations which have substantial branch network spread over a large geographical area. The field staff at the branch level should be trained to implement the strategies after modifying them to suit the environment in which they are operating. The knowledge of the local environment, demographic features and cultural aspects is an essential requirement for the field staff involved in marketing efforts for the organisation.

RURAL PSYCHOLOGY AND BANK MARKETING :

Banks have a great role to play in the development of rural areas and improvement in rural life. In order to play this role effectively, the banker should have fair knowledge of the socio-psychological aspects of the rural society he is serving. First of all, the banker should be aware of the “Human Groups and Institutions” in the area of operation. This means that one should be aware of the role of agriculture in the rural economy, cultural aspects of the society, community aspects, family and farm patterns, institutional facilities, etc. Secondly, the ‘Process of Change’, if any, taking place in the rural scenario, should be known to him. The general changes that take place in the rural scenario include urbanization, industrialisation, migration, social mobility, changes in values, farm structure, etc. Thirdly, there could be ‘Planned Changes’, generally emanating from administration of voluntary organisations, such as resettlement, land reforms, community development, agricultural extension work, education etc, of which the field staff should be familiar. Fourthly, a general idea of the status of various development projects under execution, welfare measures, schemes under implementation, etc. will help the banker to have a complete picture of the rural society in which he is operating. The knowledge on all these aspects of the rural society will help the banker in choosing the right approach to the clients in rural areas since education of the people on the services offered is an integral part of effective marketing. The psychology of the rural people should be properly understood. It is only normal that the people in rural areas do not adopt a practice immediately. In fact, the tendency of an illiterate person is to distrust the same. The banking habits are no exception to this. But subsequently, on being properly educated, he may develop interest and would like to know more about. If the information imparted convinces him that the idea is something useful, he enters the t third stage of thinking about the possibility of accepting the idea for his benefit. Thus, there are different stages in the “adoption process” of the rural folks, which should be clearly understood by the field personnel.

The cultural pattern of the rural folks influence their economic behaviour considerably. Some rural communities may have a “modern pattern” of culture. These communities would be ever willing to try something new if they are convinced that it can improve their present position. Dissemination of information on bank’s services become easy and the results are achieved at a faster pace with such groups. On the other hand, groups characterised by “traditional pattern” of culture are generally opposed to change. Their main concern will be to preserve what has been the tradition and resists intrusion in to their ways of living. Effective marketing becomes difficult while dealing with such groups. Members of the group with a modern pattern of culture tend to be individualistic, while system of social control will be more in groups with traditional pattern. In such groups, where tradition is emphasised, a far reaching change in attitude towards anything, especially banking habits can be brought about only with the support of their “Clan Leaders”. The clan leaders are the people whom the rest of the community will listen to or whose approval, explicit or otherwise, the people look forward to for accepting anything new. It is quite possible that these leaders are not formal leaders of the group such as political leaders, but could be an elderly person or a religious leader of the community trusted by the general public. Success in approaching such rural societies definitely lies in understanding the rural psychology in this regard and identifying such influential individuals from the rural masses. Any effort, therefore, to popularise the banking services in rural areas call for absolute knowledge about the social structures, the culture, the functioning of the rural groups and the nature and type of their leadership.

Changes are taking place in contemporary rural society, though at a slower pace. The elements of dynamism of stability is existent in the rural environment, in the case of urban areas, though not operative in identical degrees or patterns. The changes, however, have been generally confined to changes in the agricultural pattern, community aspects and some general changes in the economic scenario. These changes, however, generate scope for institutional services in various segments of the rural economy’s operation and the banking institutions should capitalise on the same through deep penetration into rural households. This can be made possible only if the bank’s personnel are aware of the changes taking place in the rural environment and design their approach to the situation in a skillful manner. Modifying the services to suit the dynamic environment is considered as the backbone of marketing efforts. However, while designing or modifying, it should be ensured that the products are not inconsistent with basic attitudes and cultural values of the people. Rapidity of acceptance of innovations is a function of many factors, including the nature of innovation and its relationship to existing cultural patterns.

Banking institutions are vehicles of economic development. According to Rostow, economic theories and development concepts should be linked to sociological and psychological elements, if it is to be maximally useful. Gunar Myrdal had opined that “attitudes” and “institutions” play a significant role in rapid economic development. Psychology, as a science of human behaviour emphasises the influence of human factors which accelerate or impede the rapid acceptance of innovative ideas. Marketing efforts in the rural areas should be designed with proper emphasis on these influential factors.

BANK MARKETING : ROLE OF PERSONNEL

The marketing strategy for rural areas, by and large, assigns a responsible role on branch officials in bringing out socio-economic transformation of the rural society. There is need for a total marketing approach from the personnel to penetrate all levels in all areas of banking operations. Efforts need to be made to design and launch suitably tailored services to meet its changing needs of the rural population. The personnel attempting marketing in rural areas should be able to establish an organic link with rural masses. They should be committed to the cause of rural upliftment and should implement in totality the market strategies formed for the purpose. The knowledge of the command area of the branch and the ability to identify potential customers and their financial needs are pre-requisites for the success of marketing strategies. This calls for the need of training the staff with sharp focus on improving the knowledge of the bank staff about the rural atmosphere and the skills necessary to deal with the rural customers. There is also need for developing a sense of belonging towards the organisation, customers and the society. The field staff, to the extent possible, should know the language and dialect of the people and should be able to communicate in a manner which is appealing to the people. The organisation on their part, therefore, should take adequate care in identifying the right people for this specific job. They should also foster innovative and creative approach in working to bring in new and original ideas and develop talent. There is also need for rationalisation of the work load for the personnel in the rural branches to enable them to give adequate attention to the villagers and their requirements. Further, the institutions need to motivate their personnel for popularising the services in rural areas. Every member of the staff is a salesman of the bank’s services and an ambassador of the institution among people. Marketing efforts made by the personnel and its effect on business development should be appreciated and rewarded by the bank management.

The bank personnel, as a matter of strategy, should try to find a place in the hearts of the rural folks. Role of “personal influence” on acceptance of an organisation or services in the rural scenario should be kept in mind. The “personal influence” refers to the effect of statements made by one person about the bank or its services on another person’s attitude towards the institution. In a village, people generally know one another and have time and patience to converse with one another. Opinion on the institution and its services are discussed among local people. A satisfied customer always acts as an ambassador of goodwill for the bank and brings clientele through his own efforts. The personnel, therefore, should strive for customer satisfaction as a marketing strategy, if not as the objective of the organisation.

In conclusion, it may be understood that the success of marketing of banking services in rural areas depends on how the organisation properly blends the marketing concepts with the right approach required to penetrate into rural households. And the final result of the efforts will depend on the sincerity and zeal of the field personnel making the efforts and the organisational support available to them.

Originally published in Indian Banking – Today and Tomorrow (August 1996) and updated by Shri C P Mohan, Member of Faculty

Organic Agriculture is growing from a movement among a small group of elite farmers into a mainstream activity that benefits a large number of farmers, especially small farmers. It is going to throw up several new and unique opportunities for bank lending. Banks need to prepare for the emerging business opportunities.

It is by now well recognised that Organic Agriculture is a low external input regimen. This implies that there will be limited need to bring in purchased inputs for cultivation, and will therefore mean a reduction in financial outgo, obviously not a scenario to whet the appetite of bankers. A study by the Ghokale Institute, Pune of sugarcane farmers of Jalgaon district in Maharashtra provides comparative data on the cost of organic and inorganic agriculture (Table 1).

Table 1

Comparison of Organic and Inorganic farming

(Rupees per hectare)

What will be of interest to ankers is that Organic Agriculture will result in increased surpluses at the farmer

Particulars

Organic

Inorganic

Cost of Cultivation

35632

42115

Borrowing

23540

35850

level, more due to a better bottom line even with a reduced top line. The improved bottom line will not be from a so called "Organic Premium" (which could be a temporary phenomenon) but rather from reduction in costs., A look at the comparative costs based on empirical data (Table 2), clearly brings out the dimension of “viability” of Organic Agriculture in comparison to Inorganic Agriculture.

Table 2

Economics of Organic and Inorganic Agriculture A comparison of sugarcane in Jalgaon, Maharashtra (Rupees/hectare)

Further, the coefficient of variation in Organic Agriculture is 26% as against 58% in Inorganic Agriculture (Table 3) which indicates the yield stability would better in Organic Agriculture as compared to Inorganic Agriculture.

and it is therefore going to in turn de-risk of the agricultural portfolio of the bank.

As of today, there exist no standard recommended package of practices for organic agriculture and therefore, the cash flow streams are not known. Because of this, it has not been possible to specify the scale of finance for various crops under Organic Agriculture which forms the basis for extending crop loans.

Further, most organic farmers would not be fresh entrants but would be transiting from Inorganic to Organic Agriculture. Thus most of them being progressive farmers (as would be the first adopters of many innovations) would already most likely be clients of the banking system.

Investment opportunities emerging from Organic Agriculture

Organic Agriculture will throw up several new investment opportunities for farmers and thus lending opportunities for banks. Listed below are some, which is no way exhaustive.

1. Land Development and Water Conservation measures:

Organic Agriculture involves conservation of natural resources on the farm and the two most precious resources are soil and water. The run off of top soil needs to be stopped, for which steps like contour bunding, terracing and contour trenching may have to be done. Similarly, saving water through constructions of small storage structures will be necessary. All these are investments with medium-term pay-back.

Unlike Green Revolution technology, Organic Agriculture is an integrated farming model. Most farmers have got rid of their farm animals after adopting Inorganic Agriculture. Under Organic Agriculture, it will be essential to re-acquire farm animals both for draught and farm nutrient purposes for which capital investment would be required.

Increased Labour Engagement:

Organic Agriculture while reducing external inputs will increase the demand for farm labour. In a competitive labour market, this will result in increase in labour costs and to match cash flow cycles, such labour costs will require to be funded.

4. Transition Cost:

The process of transition from Inorganic to Organic Agriculture will take between three and five years, during which time there is most likely a drop in farm yields and therefore the income of the farmer. Banks will have to design products to cover the income deficit during this period to enable farmers to maintain their cash flow by capitalizing the transition income gap and stretching-out the repayment by considering this an investment cost rather than working capital.

5. Learning Organic Agriculture & Farmers' Field Schools:

Organic Agriculture Knowledge/wisdom rests with some progressive individual farmers like Shri Bhaskar Save of Gujarat. Farmers who wish to take the plunge will find that the institutional research and extension mechanism are not geared to respond to the challenge. There will thus be an increasing need for farmers to go out and in the “guru-shishya” tradition of old, acquire wisdom at the "feet of the masters". There will not only be a direct cost in this of travel, stay and tuition, but also indirect costs of replacing own labour and supervision by hired hands. All this will throw up tremendous funding opportunities.

Enterprising Organic farmers will also require to structure their transfer of knowledge through the establishment of farmers field schools and such farmer to farmer training delivery mechanism will get organised into an institutional mould, again a lending opportunity for banks.

6. Manufacture of Organic Inputs:

This is one of the areas where banks have already taken a lead and are financing `Commercial Production units of Organic Inputs such as Bio-fertiliser units, Vermicompost hatcheries and Fruit and Vegetable waste compost units under the Government of India’s Capital Subsidy scheme of the National Project on Organic Farming. Among these, a critical area is fruit and vegetable waste composting, which is estimated to produce four lakh tones of garbage in urban centres each day from villages, which is actually precious organic manure. Not only does it cause urban waste disposal problems and loss of organic nutrients, but results in unnecessary use of fertiliser to replace lost nutrients and fuel in transport, both of which involve an outgo of precious foreign exchange. A working group of the planning commission under eminent agricultural scientist, Dr. SS Acharya, estimates that this activity alone can create 2.5 lakh jobs in rural areas.

7. Certification Costs:

Obtaining Organic Certification is an elaborate and expensive process, especially for small farmers. Even if done in a group certification mode, there will be a significant financial cost involved for the farmer. The benefits of certification being enormous, and it being a pre-requisite for access to export markets, funding the cost to the farmer by banks would be a necessity.

8.On-farm Processing:

Organic produce may often not have the physical appearance and the qualities of inorganic produce (such as thick skin in improved tomatoes), which enable the produce to withstand the stress of handling and long distance transport, and may therefore have a shorter shelf life and require greater care in handling, packing and transportation. As per current estimates, post-harvest losses in fruit and vegetables are close to 40%. Farm level pre-processing of sorting grading, packing and pre-cooling need to be developed to build an effective supply chain for agri-produce. These activities if undertaken by farmers' collectives could be more viable.

9. Integrating farm with non-farm activities to move up the value chain:

Creation of value in agriculture is possible only by processing for value addition. Agro-processing units need to be integrated with farming both for de-risking agriculture and providing gainful employment opportunities during the off season. If preliminary level processing is done at the farm, the benefits of value addition will accrue to the farmer. Activities such as mini-rice mills, dal mills, milk processing, fruit jellies, jams and pickles etc. are some immediate options, but these could go beyond to activities like mushroom, sericulture etc.

10. Unique Farm Products:

Under Organic Agriculture,every individual farmers produce would be unique and may have features that would attract consumers to demand produce from a particular farmer. Such farmers can even develop their own identity and brand, as has been done by an enterprising apple farmer in Himachal Pradesh (see box). Such initiatives will require capital for development.

The fruit & sugar ladies of Himachal Pradesh

Bhuria Village is in the remote and backward Sirmour district, which is more than three kilometers drive from Simla. The unit produces 18 varieties of jams, jellies and preserves in exotic combinations like apple-ginger jelly, black cherry preserve and orange marmalade for a target market they identify as “working mothers who are concerned about quality but have no time to labour over a jam pot in the kitchen. The niche is the double income family that is concerned about healthy food and is prepared to pay for it.".

This enterprise has been a runaway success and organic farmers such as these will multiply in the years ahead

11. Demands beyond Agriculture:

A stable and viable agricultural economy is going to be the backbone of rural India. As this happens, there will be an increasing need for resource transfers to the secondary and tertiary sector, which has been a normal economic route in most developed nations which transited from agriculture to industrial and service driven economies. Farmers' children would require funding for higher education, to be paid for from future crops and farmers will be looking to discount future cash flows from agriculture to acquire more than transactions such as televisions, refrigerators and two or four wheelers and this would be a booming market.

12. Financing Network Organisations & Farmers' Collectives:

Today, there is a lot of talk of creating producers organisations in a producer company mode. While this kind of interest is encouraging, producers companies being limited companies will have only their capital base mobilized from farmer members as resources. In the initial phase, the capital base is going to be low. Agricultural produce being seasonal and markets being year-round, there will be need for accumulation of stocks and storage by these companies. Such companies will therefore often require more working capital than block capital. Funding of such large amounts by banks for commodities having high price volatility and risk of spoilage, calls for developing/structuring innovative financing instruments. The earlier initiatives of this nature on a significant scale were undertaken by the National Dairy Development Board (NDDB) Vegetable Oil Project, where the resources were generated through the monetisation of gifted commodities from donors such as the USAID, CIDA and EEC.

Conclusion

Financing Organic Agriculture is thus going to be a challenge for bankers and would be difficult for conventional banking. Being more stable than conventional agriculture, it makes eminent sense financing Organic agriculture. But bankers will be called upon to come in and play a role even before financing, in promoting it, popularising it and developing cultivation standard and practices.

Prepared by Shri EV Murray, Member of Faculty, College of Agricultural Banking, Reserve Bank of India, Pune 411 016

Organic Agriculture is growing from a movement among a small group of elite farmers into a mainstream activity that benefits a large number of farmers, especially small farmers. It is going to throw up several new and unique opportunities for bank lending. Banks need to prepare for the emerging business opportunities.

It is by now well recognised that Organic Agriculture is a low external input regimen. This implies that there will be limited need to bring in purchased inputs for cultivation, and will therefore mean a reduction in financial outgo, obviously not a scenario to whet the appetite of bankers. A study by the Ghokale Institute, Pune of sugarcane farmers of Jalgaon district in Maharashtra provides comparative data on the cost of organic and inorganic agriculture (Table 1).

Table 1

Comparison of Organic and Inorganic farming

(Rupees per hectare)

What will be of interest to ankers is that Organic Agriculture will result in increased surpluses at the farmer

Particulars

Organic

Inorganic

Cost of Cultivation

35632

42115

Borrowing

23540

35850

level, more due to a better bottom line even with a reduced top line. The improved bottom line will not be from a so called "Organic Premium" (which could be a temporary phenomenon) but rather from reduction in costs., A look at the comparative costs based on empirical data (Table 2), clearly brings out the dimension of “viability” of Organic Agriculture in comparison to Inorganic Agriculture.

Table 2

Economics of Organic and Inorganic Agriculture A comparison of sugarcane in Jalgaon, Maharashtra (Rupees/hectare)

Further, the coefficient of variation in Organic Agriculture is 26% as against 58% in Inorganic Agriculture (Table 3) which indicates the yield stability would better in Organic Agriculture as compared to Inorganic Agriculture.

and it is therefore going to in turn de-risk of the agricultural portfolio of the bank.

As of today, there exist no standard recommended package of practices for organic agriculture and therefore, the cash flow streams are not known. Because of this, it has not been possible to specify the scale of finance for various crops under Organic Agriculture which forms the basis for extending crop loans.

Further, most organic farmers would not be fresh entrants but would be transiting from Inorganic to Organic Agriculture. Thus most of them being progressive farmers (as would be the first adopters of many innovations) would already most likely be clients of the banking system.

Investment opportunities emerging from Organic Agriculture

Organic Agriculture will throw up several new investment opportunities for farmers and thus lending opportunities for banks. Listed below are some, which is no way exhaustive.

1. Land Development and Water Conservation measures:

Organic Agriculture involves conservation of natural resources on the farm and the two most precious resources are soil and water. The run off of top soil needs to be stopped, for which steps like contour bunding, terracing and contour trenching may have to be done. Similarly, saving water through constructions of small storage structures will be necessary. All these are investments with medium-term pay-back.

Unlike Green Revolution technology, Organic Agriculture is an integrated farming model. Most farmers have got rid of their farm animals after adopting Inorganic Agriculture. Under Organic Agriculture, it will be essential to re-acquire farm animals both for draught and farm nutrient purposes for which capital investment would be required.

Increased Labour Engagement:

Organic Agriculture while reducing external inputs will increase the demand for farm labour. In a competitive labour market, this will result in increase in labour costs and to match cash flow cycles, such labour costs will require to be funded.

4. Transition Cost:

The process of transition from Inorganic to Organic Agriculture will take between three and five years, during which time there is most likely a drop in farm yields and therefore the income of the farmer. Banks will have to design products to cover the income deficit during this period to enable farmers to maintain their cash flow by capitalizing the transition income gap and stretching-out the repayment by considering this an investment cost rather than working capital.

5. Learning Organic Agriculture & Farmers' Field Schools:

Organic Agriculture Knowledge/wisdom rests with some progressive individual farmers like Shri Bhaskar Save of Gujarat. Farmers who wish to take the plunge will find that the institutional research and extension mechanism are not geared to respond to the challenge. There will thus be an increasing need for farmers to go out and in the “guru-shishya” tradition of old, acquire wisdom at the "feet of the masters". There will not only be a direct cost in this of travel, stay and tuition, but also indirect costs of replacing own labour and supervision by hired hands. All this will throw up tremendous funding opportunities.

Enterprising Organic farmers will also require to structure their transfer of knowledge through the establishment of farmers field schools and such farmer to farmer training delivery mechanism will get organised into an institutional mould, again a lending opportunity for banks.

6. Manufacture of Organic Inputs:

This is one of the areas where banks have already taken a lead and are financing `Commercial Production units of Organic Inputs such as Bio-fertiliser units, Vermicompost hatcheries and Fruit and Vegetable waste compost units under the Government of India’s Capital Subsidy scheme of the National Project on Organic Farming. Among these, a critical area is fruit and vegetable waste composting, which is estimated to produce four lakh tones of garbage in urban centres each day from villages, which is actually precious organic manure. Not only does it cause urban waste disposal problems and loss of organic nutrients, but results in unnecessary use of fertiliser to replace lost nutrients and fuel in transport, both of which involve an outgo of precious foreign exchange. A working group of the planning commission under eminent agricultural scientist, Dr. SS Acharya, estimates that this activity alone can create 2.5 lakh jobs in rural areas.

7. Certification Costs:

Obtaining Organic Certification is an elaborate and expensive process, especially for small farmers. Even if done in a group certification mode, there will be a significant financial cost involved for the farmer. The benefits of certification being enormous, and it being a pre-requisite for access to export markets, funding the cost to the farmer by banks would be a necessity.

8.On-farm Processing:

Organic produce may often not have the physical appearance and the qualities of inorganic produce (such as thick skin in improved tomatoes), which enable the produce to withstand the stress of handling and long distance transport, and may therefore have a shorter shelf life and require greater care in handling, packing and transportation. As per current estimates, post-harvest losses in fruit and vegetables are close to 40%. Farm level pre-processing of sorting grading, packing and pre-cooling need to be developed to build an effective supply chain for agri-produce. These activities if undertaken by farmers' collectives could be more viable.

9. Integrating farm with non-farm activities to move up the value chain:

Creation of value in agriculture is possible only by processing for value addition. Agro-processing units need to be integrated with farming both for de-risking agriculture and providing gainful employment opportunities during the off season. If preliminary level processing is done at the farm, the benefits of value addition will accrue to the farmer. Activities such as mini-rice mills, dal mills, milk processing, fruit jellies, jams and pickles etc. are some immediate options, but these could go beyond to activities like mushroom, sericulture etc.

10. Unique Farm Products:

Under Organic Agriculture,every individual farmers produce would be unique and may have features that would attract consumers to demand produce from a particular farmer. Such farmers can even develop their own identity and brand, as has been done by an enterprising apple farmer in Himachal Pradesh (see box). Such initiatives will require capital for development.

The fruit & sugar ladies of Himachal Pradesh

Bhuria Village is in the remote and backward Sirmour district, which is more than three kilometers drive from Simla. The unit produces 18 varieties of jams, jellies and preserves in exotic combinations like apple-ginger jelly, black cherry preserve and orange marmalade for a target market they identify as “working mothers who are concerned about quality but have no time to labour over a jam pot in the kitchen. The niche is the double income family that is concerned about healthy food and is prepared to pay for it.".

This enterprise has been a runaway success and organic farmers such as these will multiply in the years ahead

11. Demands beyond Agriculture:

A stable and viable agricultural economy is going to be the backbone of rural India. As this happens, there will be an increasing need for resource transfers to the secondary and tertiary sector, which has been a normal economic route in most developed nations which transited from agriculture to industrial and service driven economies. Farmers' children would require funding for higher education, to be paid for from future crops and farmers will be looking to discount future cash flows from agriculture to acquire more than transactions such as televisions, refrigerators and two or four wheelers and this would be a booming market.

12. Financing Network Organisations & Farmers' Collectives:

Today, there is a lot of talk of creating producers organisations in a producer company mode. While this kind of interest is encouraging, producers companies being limited companies will have only their capital base mobilized from farmer members as resources. In the initial phase, the capital base is going to be low. Agricultural produce being seasonal and markets being year-round, there will be need for accumulation of stocks and storage by these companies. Such companies will therefore often require more working capital than block capital. Funding of such large amounts by banks for commodities having high price volatility and risk of spoilage, calls for developing/structuring innovative financing instruments. The earlier initiatives of this nature on a significant scale were undertaken by the National Dairy Development Board (NDDB) Vegetable Oil Project, where the resources were generated through the monetisation of gifted commodities from donors such as the USAID, CIDA and EEC.

Conclusion

Financing Organic Agriculture is thus going to be a challenge for bankers and would be difficult for conventional banking. Being more stable than conventional agriculture, it makes eminent sense financing Organic agriculture. But bankers will be called upon to come in and play a role even before financing, in promoting it, popularising it and developing cultivation standard and practices.

Prepared by Shri EV Murray, Member of Faculty, College of Agricultural Banking, Reserve Bank of India, Pune 411 016

For calculation of fixed Cost, we may take half the value of Fixed Assets for the purposes of interest while calculating over the life of the plant. The value of fixed assets reduces, as we take out depreciation every year..

(b) VARIABLE COST

Items of cost that vary directly with the volume of production:

Cost of material;

Stores;

Electricity;

Fuel;

Transportation;

Labour;

Packing, etc.

3. SALES REVENUE

Total anticipated receipts at an envisaged price.

4. BREAK-EVEN POINT

In a manufacturing activity, at a particular level of production, the total costs of manufacturing will equal total sales revenue. This is a point of no profit no loss. Above this volume of production there is profit and below this level there is loss.

If the cost line and sales line are drawn on a graph with X axis as production and Y axis as value, then the intersection of these two lines gives the point where the sales revenue equals cost. This point is known as break-even point or point of no-profit-no-loss.

Break-even point can also be calculated mathematically as under:

BEP = F.C.

S-V

F.C. = Total Fixed Cost

S. = Unit Sales revenue

V = Unit variable cost

Margin of safety is the difference between the normal capacity and the break-even point production, where the market or the resource is new and uncertain it is safer to have a process having high margin of safety.

5. PROFITABILITY OF THE UNDERTAKING

Profit on total capital = Profit

Total capital employed

Profit on own capital = Profit___________

Own capital employed

Profit on sales = Profits (%)

Sales

These ratios will indicate profitability in relation to investment as well as sales

7. PRESENT VALUE ANALYSIS THROUGH DISCOUNTED

CASH FLOW TECHNIQUE

What are the income flows that arise from the investment ?

These are :

Amounts set apart against depreciation ;

Interest; and

Profits after taxes

If the future cash flows (that arise during the Life of the unit) are discounted as a particular rate of interest in the beginning itself, it is possible to know the present value of such cash flows.

If the discounted value of these cash flows is higher than the acquisition costs, the investment is profitable.

8. FINANCING OF THE PROJECT

a. Take into consideration various facilities available what would be the method of financing the project to maximize profit.

There is no universally accepted definition of entrepreneurship. The concept of “entrepreneurship” is elusive, difficult to define, measure and therefore, promote. The concept of “entrepreneurship” may be applied broadly or in a narrow, focused way depending on the context. “Enterprise” and “entrepreneurship” can have a range of meanings in different contexts denoting a mindset or type of behaviour (entrepreneurial behaviour) in the broadest sense or equated with a small business undertaking in the narrow sense. Entrepreneurship has typically been referred to as an action, process, or activity, in which innovation plays a significant role. The recent Green Paper on Entrepreneurship in Europe by the European Commission (2003b, p.6) defines it as follows: “Entrepreneurship is the mindset and process to create and develop economic activity by building risk-taking, creativity and/or innovation with sound management, within a new or an existing organisation”. Encyclopedia Britannica defines entrepreneur as ”An individual who bears the risk of operating a business in the face of uncertainity about the future conditions.” According to ILO “Entrepreneurs are the people who have the ability to see and evaluate business opportunities; together with the necessary resources to take advantages of them; and to intimate appropriate action to ensure success.”

(2) Role of Entrepreneurship

Despite the definitional differences, it is commonly agreed that entrepreneurship is a driving force behind SMEs. Available evidence suggests that entrepreneurship can contribute significantly to achieving key policy objectives. Entrepreneurship is an effective means of achieving certain policy objectives, but not all, and at least in the short term, there are trade offs which have to be recognised. Entrepreneurs are the driving force behind SMEs, and SMEs play an important structural and dynamic role in all economies. The main areas where increased levels of entrepreneurial activity can contribute significantly to specific policy outcomes are:

i) Create opportunities -Job creation, careers, new products/services

ii) Economic growth, productivity improvement, and innovation.

iii) Poverty alleviation and social opportunities.

iv) Create new customers and open up new markets.

Over the last two decades, there has been a shift toward encouraging greater "social entrepreneurship" as a means of poverty alleviation, increasing employment opportunities and empowerment of disadvantaged or under-represented groups, particularly in rural areas. Awareness of the potential which entrepreneurship may offer for promoting social inclusion is growing worldwide. Much of this emphasis placed by governments is focused on assisting target groups to start up micro enterprises, usually by means of the provision of low cost micro finance. These policies implemented in many developing economies have been shown to be remarkably effective by some criteria, and are well illustrated by the success of the Grameen Bank. Micro enterprises are important in their own right, for two closely interrelated reasons:

· In the longer term, they can provide a seed bed for entrepreneurship, and for the corporate growth and economic renewal needed to maintain international competitiveness. Almost all SMEs start as a micro enterprise, in that they start as a concept developed by a single person or a few people.

· In the immediate term, they can provide an alternative to unemployment, and they can provide a means of alleviating poverty and social disparities. Most micro enterprises are non-employing, but they create a job (even if it is only part time) for the entrepreneur.

(3) Education and Training in Entrepreneurship

Education and training have been recognised in this context as the single most important means for achieving the objective of fostering entrepreneurship in societies. Education and training in entrepreneurship can have two types of effects. First, they can have considerable impact on the performance of entrepreneurs, especially with regard to assisting entrepreneurs increase their firm’s chances of survival, and to a lesser extent, to help make the resulting business more profitable. Education in entrepreneurship increases the chances for start-ups and self-employment and enhances the economic reward and satisfaction of entrepreneurial individuals. Second, although extremely difficult to measure, education in entrepreneurship is also supposed to have some longer term impacts on the degree of entrepreneurial spirit and attitudes which are fundamental for an entrepreneurial population and society.

Although national governments as well as international fora, such as the EU, the APEC, and the OECD, are giving increasing emphasis to the importance of education and training in entrepreneurship, and many initiatives have been launched in practically all countries, entrepreneurship education and training are still characterised by a number of problems and shortcomings that need to be addressed urgently. These include:

- Entrepreneurship is not integrated into the curriculum, nor is it part of a coherent framework, but is more likely to be taught as a separate subject, or treated as an extra-curricular activity, resulting in a narrow impact on limited numbers of students.

- A lack of public resources for the academic discipline of entrepreneurship has resulted in limited teaching and research capability on this and related subjects, creating a major bottleneck in expanding education in entrepreneurial subjects at all levels of formal education and vocational training, as well as leading to an underdeveloped academic infrastructure in these subjects.

- A need to improve co-ordination among government agencies in designing and implementing policies for promoting entrepreneurship through co-coordinated actions, and among different government programmes and initiatives.

- Fostering entrepreneurship through training and education is not yet well integrated as part of national long term economic strategy and planning;

- A low degree of acceptance (among all stakeholders) of the broader concept of education for entrepreneurial attitude and spirit as opposed to education and training for entrepreneurial skills (business skills for SMEs).

- Development of indicators and quantitative data, and evaluation of measures undertaken, are still very limited and undertaken only occasionally.

In light of the above, issues in the area of education and training in entrepreneurship that require special government attention may include:

- Integration of entrepreneurial subjects in the formal education systems, in a coherent and systematic way, not only for the purpose of teaching entrepreneurial skills, but also for fostering an entrepreneurial population, throughout all levels of education, and an entrepreneurial society more broadly.

- Promoting various forms of public and private partnership, from internship arrangements to private financing, between public educational and research institutions and the private sector, especially SMEs.

- Increasing public funding devoted to education and research in entrepreneurship, especially for improving capacity in teacher training, and for developing curricula and programmes in entrepreneurship.

- Improving co-ordination between different government bodies involved in promoting entrepreneurship through education and training and through other initiatives.

Earlier there was a myth that those persons with business family background could become successful entrepreneur. Subsequently people started believing that individuals need technical know-how , as a major requirement for being successful in launching all industrial ventures. To understand that what actually is requires to be a successful entrepreneur, Entrepreneurship Development Institute conducted a research and found out that following major competiencies are required to be a successful entrepreneur:

Initiative: All entrepreneur takes action that go beyond job requirements or the demand of the situation.

Does things before being asked or forced by the events.

Acts to extend the business into new areas, products; or services.

Sees and Acts on Opportunities: Looks for and takes action on opportunities.

Sees and acts on opportunities (business, educational or personal growth).

Expresses confidence in own ability to complete a task or meet a challenge.

Sticks with own judgment in the face or opposition or early lack of success.

Does something that he says is risky.

Assertiveness: Confronts problems and issues with others directly.

Confronts problems with others directly.

Tells others what they have to do.

Reprimands or disciplines those failing to perform as expected.

Persuasion: Successfully persuades others.

Convinces someone to buy a product or service.

Convinces' someone to provide financing.

Convinces someone to do something else that he would like that person to do.

Asserts own competence, reliability, or other personal or company qualities.

Asserts strong confidence in own company's or organisation's products or services.

Use of Influence Strategies: Uses of variety of strategies to affect others.

Acts to develop business contacts.

Uses influential people as agents to accomplish own objectives.

Selectively limits the information given to others.

Monitoring:

Develops or uses procedures to ensure that work is completed or that work gets standards or quality.

Personally supervises all aspects of a project.

Concern for Employee Welfare:

Takes action to improve the welfare of employees.

Takes positive action in response to employees' personal concerns.

Expresses concern about the welfare of employees.

(6) Institutional Support for Entrepreneurship Development

Generally bankers and Government agencies believe that the borrower must be possessing requisite entrepreneurial competencies. Fact is that this subject is never seriously included in any school/college curricula. That is why we observe almost all the graduates (even engineering graduates) running to search a job after completion of their education and hesitate to set up a n enterprise. In fact, not only new entrepreneurs but also existing entrepreneurs need continuous education/ training to enhance their entrepreneurial competencies and skills. Recognizing this need, the Central Government and several State Governments have setup various training institutes which are engaged in providing entrepreneurship development trainings, in addition to technical training and other rendering other services. Given below is a list of such institutes. The bankers should make all efforts to ensure that their borrowers are made aware of these facilities and get training from time to time.

Name of Institute

Place

Activities

National Institute of Small Industry Extension and Training (NISIET)

Hyderabad

Training, research and consultancy services

Indian Institute of Entrepreneurship

Guwahati

Training, research and consultancy services

National Institute of Entrepreneurship and Small Business Development (NIESBUD)

New Delhi

Coordinating and overseeing activities of various institutes /agencies engaged in entrepreneurship development

Integrated Training Centre (Industries)

Nilokheri

Conducts EDP course

Institute for Design of Electrical Measuring Instruments (IDEMI)

Mumbai

Render services to the instrumentation industry

Central Institute of Hand Tools

Jalandhar

Aims at rapid growth of the hand tool sector

Hand Tool Design Development and Training Centre

Nagaur

Assistance for improvement in productivity, betterment in quality, high value addition

Central Tool Room

Ludhiana

Provides services in the area of consultancy, tool design and manufacture and technical training

Central Tool Room and Training Centre

Kolkata

Training, design and manufacture of complicated precision tools for the telecom industry and other common facility services

Central Institute of Tool Design (CITD)

Hyderabad

Training, CAD/CAM centre to train post-graduate trainees, automatic process control unit, and so on

Product-cum-Process Development Centre for Sports Goods

Meerut

Training, process and product development of sports goods, R & D

Product-cum-Process Development Centre for Essential Oils

Kannauj

Modernise and upgrade technology status for the essential oils and perfumery industry

DICs at District levelSmall Industries Development Corporations set up by various State Governments.

A brief of important institutes engaged in entrepreneurial development training is given below:

(i)The National Institute for Entrepreneurship and small Business Development (NIESBUD) : NIESBUD was established in 1983 by the Ministry of Industry (now Ministry of Small Scale Industries), Govt. of India, as an apex body for coordinating and overseeing the activities of various institutions/ agencies engaged in Entrepreneurship Development particularly in the area of small industry and small business. The Institute which is registered as a society under Govt. of India Societies Act (XXI of 1860) started functioning from 6th July, 1983. Its website can be accessed through www.niesbud.nic.in

Undertaking research and exchange experiences globally in development and growth of entrepreneurship. The Institute is actively involved in creating a climate conducive to emergence of entrepreneurship.

The trainings conducted by the Institute include:

Training of Trainers/ promoters

Accreditation Programme for Entrepreneurial Motivation Trainers.

Trainers' Training Programme for Enterprise Launching & Management.

Trainers/Promoters Programme for support organisations such as SISIs, DICs, Development Corporations etc.

(ii) National Institute of Small Industry Extension Training (NISIET): NISIET since its inception in 1960 by the Government of India, has taken gigantic strides to become the premier institution for the promotion, development and modernization of the SME sector. An autonomous arm of the Ministry of Small Scale Industries ( SSI ), the Institute strives to achieve its avowed objectives through a gamut of operations ranging from training, consultancy, research and education, to extension and information services. It has been renamed as National Institute of Micro Small and Medium Enterprises (NIMSME) (www.nimsme.org) from April 2007. The primary objective of the Institute was to be the trainer of trainers. Today, with the technological development and ever-changing market scenario, their involvement has undergone changes too. From being merely trainers they have widened their scope of activities to consultancy, research, extension and information services. Its website can be accessed through www.nisiet.gov.in

(iii)Indian Institute of Entrepreneurship (IIE): With an aim to undertake training, research and consultancy activities in the small industry sector focusing on entrepreneurship development, the Indian Institute of Entrepreneurship (IIE) was established in the year 1993 at Guwahati by the erstwhile Ministry of Industry (now Ministry of Small Scale Industry) , Government of India as an autonomous national institute. The institute started its operations from April 1994 with North East Council (NEC) , Govt. of Assam, Arunachal Pradesh and Nagaland and SIDBI as other stakeholders.

The activities of the Institute include identification of training needs, designing and organizing programmers both for development functionaries and entrepreneurs; evolving effective training strategies and methodologies for different target groups and locations; organize seminars, workshops and conferences for providing fora for interaction and exchange of views by various agencies and entrepreneurs; undertaking research on entrepreneurship development, documenting and disseminating information needed for policy formulation and implementation on self-employment and entrepreneurship.The Institute acts as a catalyst for entrepreneurship development by creating an environment for entrepreneurship in the support system, developing new entrepreneurship, helping in the growth of existing entrepreneurs and propagation of entrepreneurial education. Its website can be accessed through www.iie.nic.in

(iv) Entrepreneurship Development Institute of India (EDII): The Entrepreneurship Development Institute of India (EDI), an autonomous body and not-for-profit institution, set up in 1983, is sponsored by apex financial institutions, namely the Industrial Development Bank of India (IDBI), IFCI Ltd. ICICI and State Bank of India (SBI). The Institute is registered under the Societies Registration Act 1860 and the Public Trust Act 1950.

An acknowledged national resource institution, EDI is committed to entrepreneurship education, training and research. The institute strives to provide innovative training techniques, competent faculty support, consultancy and quality teaching & training material.EDI has been spearheading entrepreneurship movement throughout the nation with a belief that entrepreneurs need not necessarily be born, but can be developed through well-conceived and well-directed activities. Its website can be accessed through www.ediindia.org.

(v) The Institute of Small Enterprises and Development (ISED): The Institute of Small Enterprises and Development (ISED) stand for ‘Sustainable development through enterprise’. It is a multi-faceted Center for advanced learning and practice in the area of development. For the past decade, the Institute for Small Enterprises and Development has focused on research, education, innovative program design and entrepreneurship development initiatives, advocacy and networking dedicated towards sustainable development throughenterprise creation. Among the similar institutions ISED’s leading-edge is the identification of methodologies and processes that empower one to break out of existing ‘mental models’ in order to identify new opportunities, while exploiting the emerging niche. ISED's interest in linking research, policy, and action is realized through the programmes of its Activity Centers. The integration of the outcomes takes place at the Centre for Policy Integration. In realizing its vision and fulfilling its mission, the Institute also collaborates with like-minded institutions and individuals. Its website can be accessed through www.isedonline.org.

1.1 RBI introduced, in 1992-93, the prudential norms for income recognition, asset classification & provisioning – IRAC norms in short – in respect of the loan portfolio of the UCBs. The objective, inter-alia, was to bring out the true picture of a bank’s loan portfolio. The fallout of this momentous regulatory measure for the management of the UCBs was to divert its focus to profitability, which till then used to be a low priority area for it. Asset quality assumed greater importance for the UCBs when RBI introduced the Basel norms for Capita Adequacy from year-ended March 31, 2002 in the aftermath of serious financial problems in the sector. Maintenance of high quality credit portfolio continues to be a major challenge for the UCBs, especially with RBI gradually moving towards convergence with more stringent global norms for impaired assets.

1.2 The quality of a bank’s loan portfolio can impact its profitability, capital and liquidity. Asset quality problems are at the root of other financial problems for banks, leading to reduced net interest income and higher provisioning costs. If loan losses exceed the Bad and Doubtful Debt Reserve, capital strength is reduced. Reduced income means less cash, which can potentially strain liquidity. Market knowledge that the bank is having asset quality problems and associated financial conditions may cause outflow of deposits. Thus, the performance of a bank is inextricably linked with its asset quality. Managing the loan portfolio to minimise bad loans is, therefore, fundamentally important for a financial institution in today’s extremely competitive and market driven business environment. This is all the more important for the UCBs, which are at a disadvantage vis-à-vis the commercial banks in terms of professionalised management, skill levels, technology adoption and effective risk management systems and procedures.

1.3 Management of NPAs begins with the consciousness of a good portfolio, which warrants a better understanding of risks in lending. The Board has to decide a strategy keeping in view the regulatory norms, the business environment, its market share, the risk profile, the available resources etc. The strategy should be reflected in Board approved policies and procedures to monitor implementation. The essential components of sound NPA management are i) quick identification of NPAs, ii) their containment at a minimum level and iii) ensuring minimum impact of NPAs on the financials. A two-pronged strategy of preventing slippage of standard assets in to NPA category and reducing NPAs through cash recovery, up gradation, compromise, legal means etc., is called for.

2. Preventing NPAs

2.1 At the pre-disbursement stage, appraisal techniques of bank need to be sharpened. All technical, economic, commercial, organizational and financial aspects of the project need to be assessed realistically. Bankers should satisfy themselves that the project is technically feasible with reference to technical know how, scale of production etc. The project should be commercially feasible in that all background linkages by way of availability of raw materials at competitive rates and that all forward linkages by way of assured market are available. It should be ensured assumptions on which the project report is based are realistic. Some projects are born sick because of unrealistic planning, inadequate appraisal and faulty implementation. As the initiative to sanction or reject the project proposal lies with the banker, he can exercise his judgment judiciously. The banker should at the pre-sanction stage not only appraise the project but also the promoter – his character and his capacity. It is said that it is more prudent to sanction a 'B' class project with an 'A' class entrepreneur than vice-versa. He has to ensure that the borrower complies with all the terms of sanction before disbursement.

2.2 A major cause for NPA is fixation of unrealistic repayment schedule. Repayment schedule may be fixed taking into account gestation or moratorium period, harvesting season, income generation, surplus available etc. If the repayment schedule is defective both with reference to quantum of instalment and period of recovery, assets have a tendency to become NPA.

2.3 At the post-disbursement stage, bankers should ensure that the advance does not become and NPA by proper follow-up and supervision to ensure both assets creation and asset utilisation. Bankers can do either off-site surveillance or on site inspection to detect whether the unit / project is likely to become NPA. Instead of waiting for the mandatory period before classifying an asset as NPA, the banker should look for early warning signals of NPA.

2.4 The following are the sources from which the banker can detect signals, which need quick remedial action:

a) Scrutiny of accounts and ledger cards – During a scrutiny of these, banker can be on alert if there is persistent regularity in the account, or if there is any default in payment of interest and instalment or when there is a downward trend in credit summations and frequent return of cheques or bills,

b) Scrutiny of statements – If the scrutiny of the statements submitted by the borrower reveal a sharp decline in production and sales, rising level of inventories, diversion of funds, the banker should realise that all is not well with the unit.

c) External sources – The banker may know the state of the unit through external sources. Recession in the industry, unsatisfactory market reports, unfavourable changes in government policy and complaints from suppliers of raw material, may indicate that the unit is not working as per schedule.

d) Computerisation of loan monitoring – In computerised branches, it is possible to computerise the loan monitoring system so that accounts, which show signs of sickness or weakness can be monitored more closely than other accounts.

2.5 Personal visit and face-to-face discussion – By inspecting the unit the banker is able to see for himself where the problem lies - either production bottlenecks or income leakage or whether it is a case of willful default. During discussion with the borrower, the banker may come to know details relating to breakdown in plant and machinery, labour strike, change in management, death of a key person, reconstitution of the firm, dispute among the partners etc. All these factors have a bearing on the functioning of the unit and on its financial status.

2.6 ‘Special Mention’ category of accounts – Based on warning signals obtained through both off-site and on-site monitoring, banks may classify accounts with irregularities persisting for more than 30 days under ‘Special Mention’ or ‘Potential NPA’ category. This will help the bank to initiate proactive remedial measures for early regularisation. The measures include timely release of additional funds to borrowers with temporary liquidity problems and restructuring of accounts of sincere and honest borrowers after considering cases on merit.

2.7 On going classification – Although classification of assets is a yearly exercise, banks would do well to have a system of on going classification of assets and quarterly provisioning. This helps in assessing provisioning requirements well in advance. All doubts regarding classification should be settled internally and a system of fixing accountability for failure to comply with the regulatory guidelines should be introduced.

2.8 Strategy for reducing provision – The extent of provision for doubtful asset is with reference to secured and unsecured portion. Cent percent provision needs to be made for the unsecured portion. If banks can ensure that the loan outstanding is fully secured by realisable security, the quantum of provision to be made would be less. It takes one year for a sub standard asset to slip into doubtful category. Therefore, as soon as an account is classified as substandard, the banker must keep strict vigil over the security during the next one year because in the event of the account being classified as doubtful, the lack of security would be too costly for the bank.

3. Reducing NPAs

3.1 Cash recovery – Banks, instead of organising a recovery drive based on overdues, must short list those accounts, the recovery of which would provide impetus to the system in reducing the pressure on profitability by reduced provisioning burden. Vigorous efforts need to be made for recovery of critical amount (overdue interest and instalment) that can save an account from NPA classification:

a) In case of a term loan, the banker gets 90 days after the date of default to take appropriate action and to persuade the borrower to pay interest or instalment whichever is due.

b) In case of a cash credit account, the banker gets 90 days for ensuring that the irregularity in the account is rectified.

c) In case of direct agricultural loans, the account is classified NPA only after two crop seasons (from sowing to harvesting) from the due date in case of short duration loans and one crop season from the due date in case of long duration loans.

3.2 Up gradation of assets – Once accounts become NPA, then bankers should take steps to up grade them by recovering the entire overdues. Close follow-up will generally ensure success.

3.4 Recovery through legal recourse – Since provision amount progressively increases with increase in time, it is necessary to take steps to recover dues either through persuasion or by legal recourse. A strategy of fixing a dead line for recovery may force the bank to either recover or shed the asset off the balance sheet. Banks may file suits promptly against wilful defaulters. Banks can take recourse under either a civil suit or the Special Recovery Acts passed by various states or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The bank should vigorously follow up the legal cases.

6. Conclusion

6.1 Management of NPA is need of the hour. To be effective, NPA management has to be an exercise pervading the entire bank from the Board down the last level. Time is of prime essence in NPA management. The course open to the banker is to ensure that an asset does not become NPA. If it does, he should take steps for early recovery failing which the profitability of the bank will be eroded. That can trigger other problems to undermine the bank’s financial condition.

ROLE OF THE CHIEF EXECUTIVE OFFICERS OF URBAN COOPERATIVE BANKS (UCBs)

The Chief Executive Officer (CEO) occupies an important position in an urban bank. He plays a significant role in educating, involving, motivating and activating the directors. The members of staff under him seek his guidance in day-to-day functioning of the bank. The customers of the bank look to him for better customer service. The role of the CEO in an urban bank can broadly be classified under two categories – functional and developmental.

A. Functional responsibilities of a Chief Executive Officer

To organize and direct the affairs of the bank subject to the policies laid down and powers delegated by the Board of Directors.

To convene the meetings of the general body, Board of Directors and sub-committees of the Board and prepare agenda notes for submission before these bodies and record the minutes thereof.

To take action on the resolutions and decisions taken by the general body, the Board of Directors and its sub-committees.

To conduct all the correspondence on behalf of the bank.

To decide upon the admissibility of nominal members.

To place the applications for regular membership or for additional share capital before the Board with his own recommendations.

To demarcate the duties and responsibilities of all the staff working under him.

To arrange for proper maintenance of all the required books of account and registers, and for their periodical balancing.

He can sanction secured and unsecured loans and advances either singly or jointly up to the limits specified by the Board, subject to subsequent reporting to the Board. Credit applications for amounts beyond his sanctioning powers should, however, have to be placed before the Board/sub-committee after proper appraisal along with his comments/recommendations.

To arrange for post-disbursement credit supervision and for recovery of loans and advances granted.

To arrange for acceptance of different types of deposits and arrange for issue of receipts/statements of account/passbooks.

To arrange for all lawful payments.

To arrange for safe custody of movable and immovable property of the bank, or of the articles placed with the bank for safe custody or as security.

To arrange for recruitment of required staff and to attend to all staff matters including rotation of their duties, transfer, disciplinary action, wherever required, sanctioning leave of absence, etc.

To arrange for investment of surplus funds of the bank in accordance with the investment policy laid down by the Board and to report the particulars of such investments to the Bank Board in its next meeting.

To represent the bank in all legal proceedings involving the bank.

To exercise such other powers and discharge such other duties as may be delegated or entrusted to him by the Board.

B. Development Role:

i)

Mobilisation of deposits - Deposits are an important source of funds for a bank. As such, the bank should constantly endeavor to mobilize the savings of the society. The CEO has an important role to play in this regard. He has to devise innovative and attractive deposit schemes suitable to the clientele and get them approved by the Board. In this exercise, he can enlist the active participation of the members of his team. Through building up rapport with his clientele, he can attract deposits.

ii)

Advances portfolio – The funds mobilized have to be profitably invested in lending to the members. Even here, the CEO can arrange for identification of different activities and borrowers to ensure a wide dispersal of credit risk and endeavour to obtain maximum return on investment.

iii)

Customer service - A better customer service will ensure a satisfied clientele. This will enable the bank to withstand effectively the competition from other segments of financial system. The CEO will, therefore, have to ensure that customers are provided the best of service.

iv)

Funds management - Although the funds mobilized have to be primarily utilized for lending, it may not always be possible to deploy all lendable resources in loaning. The CEO will, therefore have to see that the surplus funds are deployed in other forms of investment keeping in view the principles of investment such as safety, liquidity, profitability, etc. He has to be aware of the latest developments in capital and money markets and constantly look for avenues for profitable investment. He should not keep the funds idle.

v)

Team building and training - For building up an efficient management team, the CEO should play a leadership role and provide an opportunity for the other members of his team to update their knowledge and sharpen their skills through various training programmes. The development of sub-ordinates is one of the important tasks of the Chief Executive Officer.

Qualities of a good CEO

Some of the important qualities which go to make a good CEO are as follows:

Leadership skills.

Ability to plan various aspects of bank's functioning.

Ability to communicate with others effectively.

Ability to motivate the members of the Board as well as his sub-ordinates for better results.

Inquisitiveness to learn and absorb new things which may be useful to the bank.

Ability to analyse the various aspects of an issue and find practical solutions.

He should be result-oriented.

Tactfulness in his dealing with the directors, staff and clients.

Willingness to educate and develop his subordinates.

Willingness to delegate his powers for effective functioning of the organisations.

He should have a vision for the growth of the organization.

Ability to socialize and be genial with existing and potential customers for development of bank's business.

Conclusion

In view of the pivotal role played by the CEO, the Board should take care to select a well qualified and experienced person having most of the above qualities as the CEO of the bank. He should be provided an opportunity to develop his personality, and skills and enrich his knowledge. He should be entrusted with adequate powers for discharge of his duties. He should also continue in the service of the bank for sufficiently reasonable period. Only then can he be an effective CEO.

The Reserve Bank of India (RBI) as part of its responsibility to supervise, control and develop the urban banking movement along sound lines, it has to ensure the existence of a strong and viable urban banking structure which will be in a position to render effective service to the community. However, a number of weak and uneconomic units emerged over a period of time for historical reasons. The entry of such marginal institutions whose working constituted a drag on the urban banking system prompted the RBI to create a system to constantly examine the causes of such weaknesses and devise ways and means to put them on a sound footing. This is being done by evolving certain norms for identification of such units as 'weak', fixing time bound action programmes for their rehabilitation and making arrangement for a regular flow of information regarding their progress.

This system was originally introduced in the year 1972 by erstwhile Agricultural Credit Department and was slightly modified later on.

2. DEFINITION OF WEAK BANKS

Prior to March 2002, urban cooperative banks (UCBs) were classified as ‘weak’ if they meet any one of the following criteria:

a). Owned Funds are eroded to the extent of 25 per cent or more by unprovided for bad and doubtful debts, other bad assets and accumulated losses or overdues exceed 50 per cent of the loans and advances outstanding, and

b). Does not comply with provisions regarding minimum share capital in terms of Section 11(1) of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies), that is, the real or exchangeable value of paid-up share capital and reserves has fallen below the stipulated norm of Rs. 1 lakh.

Based on the recommendations of the High Power Committee (HPC), the norms for classification of UCBs as ‘weak’ and ‘sick’ were revised with effect from March 31, 2002 as under:

Norms

Weak Banks

Sick Banks

CRAR

CRAR falls below the level of 75% of the minimum prescription

OR

If CRAR falls below the level of 50% of the minimum prescription

AND

Level of NPAs

Net NPAs 10% or more but less than 15% of loans and advances outstanding as on 31 March

OR

Net NPAs 15% or more of loans and advances outstanding as on 31 March

OR

Record of Profitability

Showing net losses in operation for two years out of the last three consecutive financial years

Showing net losses in operation for the last three consecutive financial years

The UCBs and their Federation / Associations represented to the Reserve Bank of India that the above norms for classification of UCBs as ‘weak’ were stringent, since each of the parameters were inter-dependent. Besides, the nomenclature of ‘weak’ UCB signalled a negative connotation, rendering the bank’s turnaround difficult. The issues were examined by the Anant Geete Committee and the Committee recommended that the Reserve Bank may consider modifications of the norms for classification of UCBs as ‘weak’ and that the nomenclature of ‘weak’/’sick’ may be dispensed with. Accordingly, as approved by the Board for Financial Supervision at its meeting held on February 27, 2003, UCBs may be classified into various grades, as under:

Grade I: Sound banks having no supervisory concerns would be classified under Grade I

Grade II (Problem Banks): Banks meeting any one of the following parameters are classified under Grade II banks:

CRAR one percent below the prescribed norms, or

Net NPAs of 10 % or more but below 15%,

or

Incurred net loss for the financial year ended,

or

Defaulted in the maintenance of CRR / SLR in the previous financial year and / or there is more or less continuous default in maintenance of CRR / SLR during the current year

c. Grade III (Weak Banks): Banks meeting any two of the following conditions would be classified under Grade III:

CRAR falls below 75% of the minimum prescribed but 50% or above the level required

Net NPA of 10% or more but less than 15%

Incurred net losses for two years out of the last three years

d. Grade IV (Sick banks): Banks meeting the following conditions will be classified under Grade IV:

CRAR is less than 50% of the prescribed limit and

Net NPA is 15% or more as on March 31 of the year or

Incurred net losses for the last three consecutive years

However, in cases where the banks fulfill any one of the conditions in Grade IV, these banks in view of the fact that they do not meet the two conditions required for classification as Grade IV, will be classified as Grade III.

3. SYSTEM OF IDENTIFICATION OF WEAK BANKS

According to the present guidelines the financial health of UCBs is determined on the basis of statutory inspections carried out by RBI at periodical intervals. At times, special investigations are conducted on the basis of complaints received or information received from other sources also form basis to judge the financial soundness of banks. Based on the estimate made by the inspecting officers of RBI on the erosion in value of the assets, level of overdues, and other financial indicators, the banks are classified into any one of the categories referred to above. In such cases, the banks concerned are advised of their inclusion in the list of weak banks immediately after finalisation of inspection reports. Apart from the statutory inspections/special investigations, the banks are also required to submit annual statements showing the position of overdues, unprovided for erosion in the value of assets as per the estimates made in the inspection report. Based on the financial particulars furnished in the annual statements, the Regional offices of RBI classify the banks into weak.

As on March 2005, the distribution of UCBs in various Grades is as per the table:

Grade I

Grade II

Grade III

Grade IV

Total

Ahmedabad

122

53

87

46

308

Bangalore

80

58

118

40

296

Bhopal

20

17

27

13

77

Bhubaneswar

1

5

4

2

12

Chandigarh

11

–

2

4

17

Chennai

44

25

54

10

133

Guwahati

6

2

5

5

18

Hyderabad

44

35

31

17

127

Jaipur

23

11

4

1

39

Jammu

2

–

2

–

4

Kolkata

29

12

4

6

51

Lucknow

54

8

7

8

77

4. CAUSES FOR WEAKNESS OF BANKS

A. Internal Factors

Management

Directors with questionable characters

Favoritism in sanctioning of loans and advances and recruitment

Sanctioning of loans to directors, relatives violating directive on maximum limit of advances

Lack of interest in turnaround of the bank

Interference in the day-to-day functioning of the bank

Staff

Low productivity

Staff with low morale

Lack of qualified and trained staff

Lack of interest in the turnaround of the bank

Involvement of staff in frauds, misappropriation, etc.

Loan policy and procedure

Lack of proper system for assessment of loans proposals

Predominance of loans for unproductive purposes which do not generate income to repay loans

Lack of system of verification of end use resulting in misuse

Concentration of loans to a few directors/preferred borrowers

Financing of defaulters

Lax in initiating action against defaulters

Delay in realizing the security offered

Financial

Low capital base

Low level of business resulting in inadequate margin

Injudicious management of funds

Over extended position of loans and advances

Heavy overdues and non-performing advances resulting in low margin

Heavy losses due to frauds, misappropriation etc.

Reliance on high cost deposits

Low yield on assets

House Keeping

Location Poor upkeep of premises

Lack of publicity

Poor customer service

B. External

Changes in policies such as interest rate structure etc.

Political interference

Escalation of establishment cost due to wage revision

Competition from banks and other non-banking financial intermediaries

Lack of potential

Natural calamities in the area of operation of the bank

5. MONITORING OF WEAK BANKS

5.1 Bank Level Review Committee

Banks which are classified as 'weak' are simultaneously placed under the scheme of rehabilitation. The bank is advised to constitute Bank level review committee consisting of Chairman and chief executive officer of the bank and a representative each of the Cooperation Department, Federation and DCCB. The task of the bank level review committee is essentially to draw an action plan for rehabilitation of weak banks within a specified time frame as per guidelines of RBI. The details guidelines in this regard are given in Annexure III. The committee is expected to meet at quarterly intervals to review the progress made by the bank vis-à-vis the targets fixed for improvement of business and recovery of overdues in the action plan.

5.2 State level review committee

For attending to the entire work relating to rehabilitation of weak banks including the monitoring of the working of the district level review committees for rehabilitation of weak banks, drawing up of action programmes for non-viable institutions monitoring the position of banks which do not satisfy Section 11 of the Act ibid etc., state level review committees are set up at the instance of RBI with the following members.

1) Registrar of Cooperative Societies as Chairman

2) Representative of the Managing Director of the State Cooperative Banks as Convener

3) Chairman/Chief Executive of the State Federation/Association of Urban Banks

4) A representative of the Regional Office of the Urban Banks Department of the RBI.

The Committee is expected to:

1) Review the programme of rehabilitation of weak banks.

2) Monitor the implementation of the action programmes drawn up for banks not satisfying Section 11 of the BR Act and decide on the future course of action in the case of such banks by merger or liquidation as the case may be.

5.3 Role of State Cooperative Banks (SCBs)

Being the leader of cooperative movement, the SCBs were advised to assume responsibility for rehabilitating weak banks in June 1973, so as to ensure effective and expeditious implementation of the rehabilitation should be drawn up in respect of weak banks in their jurisdiction and their performance carefully monitored by a separate rehabilitation cell constituted for the purpose. Besides, they were advised to review the progress of the rehabilitation of weak banks at their own board meeting with a view to suggesting steps for speeding up the implementation of the programme. It was also stipulated to keep RBI posted with the steps taken in this regard.

6. Vision Document and TAFCUB

The Reserve Bank of India regulates the UCBs through its Urban Banks Department (UBD). In the process of regulating and supervising the UCBs it was felt that there is a need to adopt a State specific approach. The UBD came out with a Vision Document which aimed at creating a State Level Task Force on Coop Urban Banks (TAFCUB) comprising of RD, RCS, Central Office and in-charges of UBD ROs and a representative each from NAFCUB and state federations. An MOU was signed with nine states so far in this regard which included the States of Gujarat, Andhra Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Chattisgarh, Uttarakhand, Rajasthan and _____. It was agreed upon by the stakeholders of the TAFCUB that it would identify the potentially viable urban cooperative banks and draw up a time bound action plan for revival of UCBs by setting specific monitorable milestones. Under the proposed operating framework of the Vision Document it has been envisaged that UCBs would be categorized into:

Unit Banks (Deposits Less than Rs. 50 crore): These banks would have a simplified regulatory regime and CRAR maintenance could be replaced by NOF to NDTL ratio. Other stipulation prescribed under the Vision Document are:

Exposure to sensitive sector restricted

Lower prescribed limit for investment in G-Sec

Restrictions to insulate them from systemic shocks

Restricted geographical operations

Such banks to roll back operations in far off locations

All other Banks: These UCBs would have regulatory prescriptions as applicable to commercial banks and the extant relaxations applicable to these UCBs may continue up to the period specified. However, the following stipulations have been recommended by the Vision Document:

There should be no concept of unscheduled multi state bank

CRCS may ensure that a bank is scheduled before it is granted license under MCS Act

Existing scheduled banks both under MCS Act and State Cooperative Societies who do not comply with prudential and regulatory regime akin to that of commercial banks could be excluded from second schedule of RBI Act

8. Norms for deletion of banks from the list of weak banks

A weak bank's name is deleted from the list on fulfilling the undernoted criteria.

The unprovided for bad assets (i.e. bad debts and other intangible assets) constitute less than 25% of the owned funds (excluding the provisions for bad and doubtful debts and other assets).

The paid up share capital and reserves created out of profits exceed bad and doubtful debts, accumulated losses and other overdues over three years by at least Rs.1 lakh.

The percentage of overdues to the loan outstanding do not exceed 25% at the end of last two consecutive cooperative years.

The bank should have shown qualitative improvement in managerial competence, mobilization and deployment of resources, loan policy and procedures etc.

While financial parameter (1 to 3) could be assessed from the statements received from the banks, it may not be possible to assess the fourth parameter independently without an inspection. As it may not always be possible to have an inspection of the bank during the period immediately preceding the date of review of its financial position for the purpose of annual preparation of the list of weak banks. RBI may not be in a position to delete a bank from the list of weak banks inspite of its fulfilling the financial norms for deletion. It may not, however, be proper to treat a bank as weak inspite of an overall improvement in its financial position. Hence, banks which have fulfilling the financial norms for deletion as per the review are placed under a separate list styled as "weak banks under observation". The rehabilitation committee constituted for these banks should, howver, be continued till such time the banks are actually deleted from this list after an inspection duly ensuring that there had been qualitative improvement in the bank's operational efficiency.

ANNEX – I

Present viability norms (1993)

To be achieved by the end of 3 years

(Rs. in lakhs)

Items

Centres with population of

50 lakhs & above

10 lakhs to 50 lakhs

1 lakh to 10 lakh

10000 to 1 lakh

1. Share capital

75

40

25

10

2. Reserves

30

16

10

4

3. Deposits

645

344

215

86

4. Advances

525

280

175

70

5. Working capital

750

400

250

100

6. Membership (Nos.)

6000

4000

3000

2000

ANNEX – I A

Viability norms (1986)

(Rs. in lakhs)

Items

Metropolitan Centres with population of

Urban centers with population of

Semi Urban Centres with population less than 1 lakh

25 lakhs

10-25 lakhs

5-10 lakh

1-5 lakh

20

12

8

6

3

4

2

2

1

1

156

94

62

47

24

20

12

8

6

2

140

84

56

42

21

200

120

80

60

30

ANNEX – II

Rehabilitation of weak primary co-operative banks - Guidelines

The programme of rehabilitation of a weak primary cooperative bank may cover the following aspects :

Detailed investigation of overdues

2. A detailed investigation will have to be made with a view to locating the factors that may be responsible for the high level of overdues. The overdues may be high on account of defective loan policies and procedures of the bank such as predominance of loans for unproductive purposes which do not generate the necessary repaying capacity; sanctioning of loans in excess of the repaying capacity of the borrowers; lack of proper verification of the genuineness of purposes for which loans are advanced; misutilisation of loans, financing defaulters; inadequate security etc. The overdues may also be high on account of lack of timely action and adequate efforts for recovery. Case by case analysis of overdue loan accounts particularly in respect of accounts in overdue for more than 1 year will have to be made and take suitable action for early recovery.

Estimate of erosion in the value of assets

3. The detailed investigation of overdues suggested above will enable the bank to know the prospects of realisability of its overdue debts and, on that basis, make an estimate of its likely bad and doubtful debts. The bank may also examine the realisability of its other assets and thereafter prepare an estimate of total erosion in the value of its assets. A comparison of the estimated erosion in the value of assets with the corresponding reserves will enable the bank to find out the shortfall in reserves. The shortfall in reserve is indicative of the weakness of the bank and the more the shortfall the greater is the weakness. This shortfall should, therefore, be made up by strengthening the bad and doubtful debt reserve of the bank by making allocations out of distributable profits in future years. If the erosion is on account of accumulated losses, the bank has to change the business mix and go in for quantum jump of business. The bank should not declare any dividend to it shareholders till it comes out of 'weak' list.

Action for recovery of overdues

4. Default may be either due to borrower's inability to repay or unwillingness to repay. It is necessary for the bank to initiate suitable action promptly to guard its interests by proceeding against the borrower as well as the security offered by him. The investigation of overdues will enable the bank to determine the course of action to be taken for recovery of overdues. Generally, the period of default and the nature and extent of security available will be the guiding factors for determining the course of action. Whereas persuasive measures may yield the desired results in cases where overdues are comparatively recent and are fully secured, more positive steps, such as filing of arbitration cases, may be necessary in cases where the overdues have been continuing for more than 6 months and the loans are either unsecured or the security is inadequate. While investigating each overdue loan account, it would be desirable for the bank to make a periodwise and security-wise classification of overdues and on that basis draw up a definite programme of action for recovery in respect of each overdue loan. Legal action may also have to be initiated for the recovery of amounts involved in misappropriations, etc.

5. Filing of arbitration cases and obtaining awards would not in itself bring in the recoveries from the borrowers. Several cases have been observed where sizeable amounts in respect of suit-filed and decreed debts have proved irrecoverable either on account of delay or reluctance on the part of the bank to send the awards for execution. The bank should, therefore, promptly send for execution all the awards obtained against the borrowers. The progress in the filing of arbitration and execution cases and the recovery of overdues should be reviewed by the Board of Directors of the bank in each meeting and the Board on a review of the progress should suggest further measures to be taken in this behalf.

Rationalisation of loan policies and procedures

6. Many of the evils that weaken the financial soundness of a banking institutions are due to its defective loaning policies and procedures. A thorough review of the loan policies and procedures of the bank under rehabilitation will, therefore, be necessary with a view to streamlining them. An analysis of overdue loan accounts suggested in para 1 above would throw light on the defective features in the loan policies and procedures of the bank. There may be preponderance of loans for unproductive purposes such as for meeting consumption needs, repairs to houses, ceremonial expenses, etc. While grant of loans for consumption purposes and meeting the family needs is one of the legitimate functions of a primary co-operative bank, such advances do not generate any repaying capacity and, therefore, should have to be kept within reasonable limits. It would be desirable for the bank to encourage loans for productive purposes such as trade and commerce, small scale industries, technical training, purchase of implements and other materials required by artisans, setting up of legal/medical practice, etc. which enhance the income earning capacity of the borrowers and thereby make the loans self-liquidating. It should be ensured that loans for unproductive purposes do not exceed 15 to 25 per cent of the total loans and advances.

7. Loans may have been sanctioned without regard to the repaying capacity of the borrowers rendering the recovery of such loans difficult. It is necessary that the repaying capacity of the borrowers is worked out on a realistic basis taking into account his total income, expenditure, existing indebtedness, etc. and the loans are restricted to be well within his repaying capacity.

8. Security also constitutes an important consideration for determining the realisability of loans. It has to be seen whether there is preponderance of unsecured loans. It is also possible that though the security is obtained, it is relegated to a mere formality because either it does not conform to the essential attributes viz. marketability stability and transferability on the necessary formalities are not observed for creating an effective charge on them in favour of the bank. According to sound banking practice, advances should be backed by tangible security which should be adequate, readily realizable, stable in value and free from encumbrances. It is likely that bulk of the advances may have been sanctioned by the bank against the security of the mortgage of real estates which does not satisfy the above tests of good security. It would be desirable for the bank to diversify its lending risks by obtaining from the borrowers easily relisable securities such as government and other trustee securities, quoted shares, gold ornaments, merchandise, etc. and restrict its unsecured advances.

9. The bank should have to ensure that its loans and advances are not concentrated among a few borrowers, but are spread over a large number of members of different categories. For this purpose, a definite ceiling may be prescribed in the bylaws of the bank on the borrowings of a member against any/all types of security.

10. The bank should also have to ensure that in each case the type of loan sanctioned has relevance to the nature of accommodation required. For example, financial accommodation for meeting the working capital requirements of merchants, traders, artisans and industries should be sanctioned in the form of cash credit and not in the form of fixed loans and loans to members with fixed incomes and to salaried class should be made repayable in monthly instalments.

11. The bylaws of a primary cooperative bank generally lay down broad lending policies such as the purposes for which loans can be advanced, maximum amounts that can be sanctioned against different types of securities, etc. Further details in this regard may be incorporated in the subsidiary rules framed for different types of loans and advances. The application forms prescribed for different types of loans and advances should provide for all essential details such as purpose of loan, period of loan, income and expenditure of the borrower, etc. so as to realistically assess the need and the repaying capacity of the borrower. It should be ensured that loans are sanctioned by the competent authority only after through scrutiny and verification of details given in the application and with reference to the past performance of the borrower. A defaulter should not be financed under any circumstances. The bank should also evolve arrangements for supervision over and verification of the hypothecated/pledged stocks.

Mobilisation of resources

12. The resources of a primary cooperative bank generally comprise the paid up share capital, the reserves created out of the profits and the deposits mobilized by it. Borrowings from higher financing agency will be practically Nil. The share capital base of the bank can be strengthened by increasing the membership and introducing linking of shareholdings to borrowings. The bank should make efforts for increasing its membership and collect share money from its borrowing members to the extend of 5 per cent of its unsecured advance and 2 1/2% of its secured advances.

13. Mobilisation of deposits assumes a special importance in the context of increasing and diversifying the loan operations of the bank and from the point of view of embarking on new activities such as financing small scale industries. The bank should also introduce attractive schemes for mobilizing deposits such as cumulative deposits, pigmy deposits, recurring deposits, etc. which can suit the needs and meet the tasks of the different categories of clientele. The rates of interest on deposits should be periodically reviewed to ensure that they are competitive with our banks. The bank should also diversify its activities and widen the range of banking facilities to its customers. The bank should constantly strive to improve the quality of services provided to its customers since the promptness, efficiency and courtesy are the important features that contribute to the success of a bank in mobilizing deposits.

Management of resources

14. The proper management of resources comprises raising funds at the cheapest rates and their deployment so as to ensure maximum profits with due regard to liquidity and security. The bulk of the resources of a primary cooperative bank comprise deposits. While no ideal proportion can be suggested between the fixed deposits on the one hand and the savings and the current deposits on the other, in cases where fixed deposits for one year and above form more than 50 per cent of the total deposits, there may be need for taking rigorous steps for mobilizing current and savings deposits.

15. The bank should have to ensure strict compliance with the statutory provisions regarding maintenance of cash reserve and liquid assets. Deficits in cash reserve and liquid assets would be indicative of inefficient management of resources. At the same time, the bank should have to avoid heavy surpluses in cash reserve and liquid assets. In deciding the form in which liquid assets should be maintained, liquidity as well as profitability should be the governing factors. The bank should not keep unnecessarily heavy cash balances or balances in current accounts with the notified banks/ central cooperative bank of the area which do not earn any income to the bank. The liquid assets can be kept in the form of investments in Government and trustee securities, fixed deposits with the concerned central cooperative bank, etc. which would earn income to the bank.

16. The most remunerative investment to the bank is in loans and advances which carry interest higher than any other form of investment. At the same time care should be taken to ensure that is no overextended position of loans and advances. Such a situation arises if the total investments of a bank in loans and advances exceed 75 per cent of its owned funds (including the statutory reserve fund), 70 per cent of its deposits and 100 per cent of its borrowings. The proportion of loans granted for short term and medium-term purposes should also depend on the pattern of resources mobilized by the bank for the purpose. The yield on advances should be worked out and should be compared with the industry average. It it is very low vis a vis the industry, then it could be due to preponderance of loans with lower interest rates, high overdues and Non-performing Assets.

17. Efficient management of a bank depends on the competence of its staff. In a weak bank the staff morale would be at the lowest ebb. The management and the CEO should exhort them with a view to produce better results. Training plays an important role. It may be necessary to take up with the Federation to arrange suitable training programme for the staff and workshop for the management. The bank should specifically lay down the duties and the responsibilities of the various categories of the staff and ensure that the staff discharges them efficiently. Normally, the productivity of the staff would be very low. The staff should be motivated to improve their performance.

Constitution of a Review Committee

18. A review committee may have to be constituted for the bank to periodically assess the progress in the implementation steps to be taken in this behalf. The committee may consist of the Chairman and Secretary of the concerned primary cooperative bank and a representative each of the central cooperative bank of the area, Federation and the Cooperation Department. The Review Committee should meet at least once in a quarter. The concerned Regional Office of the Reserve Bank of India will be providing necessary guidance in the implementation of the rehabilitation programme from time to time.

The Committee is expected to fix realistic targets in respect of deposits, share capita, advances and recovery. An important requirement of the Committee is the committee should take the moral responsibility in turning around.

"Internal Control system is one wherein the accounting work of the employee is complemented and verified by the work of another employee – both the employees working independently and without duplication of each other's work".

Professor Alfred W. Johnson

1. Internal Control - Definition:

Internal controls comprise of the system and procedures, which provide complimentarity cross-checks and independent review methodologies adopted within a business in order to –

safeguard its assets,

ascertain the accuracy and reliability of its accounting data,

promote operational efficiency, and

encourage adherence to prescribed managerial policies.

2. Internal Control – Attributes:

It involves the following attributes:

(a) appropriate segregation of functional responsibilities, system authorization and record procedures adequate to provide reasonable accounting controls over assets, liabilities, revenues and expenses,

(b) sound practices to be followed in performance of duties and functions in each department,

(c) a degree of quality of trained personnel commensurate with the responsibilities / accountabilities.

3. Internal Control – Objectives:

Since assets have to be safeguarded against loss that may arise from waste, fraud stagnancy, error, inefficiency, carelessness, casualty or untoward happenings, the foundation of internal control is, therefore, greatly dependent on

(1) Administrative Controls, and

(2) Accounting Controls.

Administrative Controls require –

neatly codified responsibility areas,

job functions,

selection and training of personnel, fidelity standards,

supervision,

accountability,

division of duties (i.e. separation of personnel who deal with operations on assets from those who maintain relevant accounting and records),

separate custodianship,

a system of periodical double checks,

rotation of duties,

a system of authorization at various levels,

periodical internal auditing and independent examination.

Accounting Controls require –

a complete and integrated system of accounting,

written manual,

forms and documentation,

authorization standards

controls to verify accuracy of accounting inputs and outputs as well as operational results.

A good internal control mechanism aims to ensure that no individual employee is in a position to make significant errors or perpetrate significant irregularities without timely detection and thereby envisages that the business operations of the bank are on sound lines, both from administrative and accounting angles.

4. Internal Control – Tools:

Direct

Tool

(a) Internal Audit & Internal Inspection

(b) External Audit & Inspection

(c) Visits by Controlling Authorities

Internal

Control

Periodical Control Returns

Indirect

Tool

4.1 Internal Audit v/s Internal Inspection:

Internal Audit

Internal Inspection

1

Audit is a quantitative analysis of the operations of an organization.

1

Inspection is fundamentally a qualitative review of the affairs of an organization.

2

Its basic purpose is primarily to ascertain correct and honest record keeping in accordance with sound accounting principles and statutory requirements

2

Its basic objective is not only to verify observance of prescribed procedures and guidelines, but also to promote and maintain safe and sound operating practices and conditions.

Internal Audit

Internal Inspection

3

Its scope is to see whether –

3

Its scope includes all the scopes of Audit, plus, it includes a critical review of the entire working of the branch -

i)

books and records are maintained as per instructions received from Head Office from time to time,

i)

It assesses the quality and quantum of business the branch has attracted,

ii)

an accurate and correct record of liabilities and assets of the branch is shown in its books,

ii)

it also assesses scope for further development in the area of its operations.

iii)

assets shown in the books physically exist or are otherwise identifiable or satisfactorily realizable,

iii)

examines whether pattern of branch advances generally conforms with overall lending policies of the bank and in furtherance of socio-economic goals.

iv)

documents obtained by branch from borrowers are complete and enforceable,

iv)

recommends corrective action for removal of deficiencies irregularities and make practicable suggestions for toning up overall working efficiency of the branch

v)

a proper record of Head Office instructions received from time to time is kept and the extent to which they have been complied with,

vi)

advances granted and expenses incurred have proper sanctions,

vii)

internal checks and controls as prescribed are being properly operated, and

viii)

returns to Head Office / Controlling Office ( ZO / RO / DO) and statutory returns are being correctly complied as also regularly and promptly submitted.

4.2

Internal Audit / Inspection – Different Types:

(A)

Concurrent/Controlling Audit -

Meant for ELBs / VLBs / Specialised Branches / Poorly rated branches

carried out either by External Auditors (e.g. C.A. Firms) or by internal inspectors / auditors

aims at keeping routine transactions under check on an on-going basis. It is like checking of yesterday's transactions today.

it's a process emphasizing proper appreciation among bank personnel about the controls that should be exercised / practiced diligently in computer environment.

(D)

Short / Spot Audit -

conducted either by Internal Auditor / Inspector or by outside CA firms

carried out at the instance of Head Office / Zonal Office either on their own or at specific requests from Regional offices as and when warranted by any emergent situations such as detection of frauds etc.

(E)

Verification / Circle Audit -

conducted in between two consecutive Head Office inspections

covers verification of cash, currency chest, SCD balances holdings safe deposit articles, verification of advances and securities charged to the bank against advances, position of time barred documents etc.

(F)

Management Audit -

Objective is to see that there is proper control and supervision of the management and nobody is left free to exercise his power and authority arbitrarily and without check as also such power is exercised rightly and effectively in achieving the objectives of the Bank.

Covers systematic appraisal of managerial functions, performance and role as also quality of management at all levels and units, i.e. the Head Office / Regional Office / Zonal Offices and the selective branches.

(G)

Financial Audit / Inspection -

Done at periodical intervals either by the staff of the Audit Department or by the office of the bank, higher than the unit / branch audited or by C.A. firms,

being most comprehensive in nature, it covers verification of assets and liabilities of the bank, as also attempts to determine adherence to sound bank accounting and procedures.

(H)

usually meant for Head Office departments and controlling offices,

essentially covers systems and procedures laid down for different transactions,

objective is to ascertain compliance with prescribed systems and procedures and to suggest modifications, if necessary.

4.3

External Audit / Inspection

The evaluation of internal controls is also done by External Auditors / Inspectors. The two main types of audit / inspection by external agencies are Statutory Audit and RBI Inspection.

(A)

Statutory / External Audit:

It is an annual audit determined by the statute and conducted within a month of the end of the financial year.

Essentially a balance sheet audit,

covers audit of selected branches and various departments of Head Office to ensure that its balance sheet and Profit & Loss A/c reflect a true and fair view of the state of its affairs and profit or less for the period.

It also certifies correctness of asset classification of the bank branch strictly in consonance with RBI guidelines issued from time to time.

(B)

RBI Inspection -

Objective is to protect interests of banks and their depositors through maintenance of a sound banking system and to ensure implementation by banks of the declared policies of Government and RBI, aimed at promoting a balanced economic growth.

This inspection involves an overall assessment of assets and liabilities of the bank organizational set-up, branch expansion, manpower planning and training, profit planning, adequacy and effectiveness of Head Office control and supervision over its branches, etc.

Internal audit / inspection system constitutes an important means towards this end.

4.4

Visits by Controlling Authorities

Periodical visits to branches paid by senior executives of the Controlling Offices, i.e. Zonal / Regional Offices serve as another effective tool of internal control system. Periodicity of branch visits is usually as follows:

Sr.

No.

Nature of Branches

Frequency of Visits by

Zonal Manager

Regional Manager

1.

Very Large / Extra Large Branches

(VLBs/ELBs)

Once in every half year

-

2.

Regional offices

Once in every half year

-

3.

Critical / Unsatisfactory Branches

Once in every half year

once in every quarter

4.

Rural Branches

Once in a year

once in every quarter

5.

Metro / Urban / Semi-Urban Branches

once in 18 months (i.e. 1.5 year)

once in every half year

Visiting Officials in their visit reports usually comment on different aspects of internal control viz. position of balancing of books of accounts, progress in respect of compliance with various audit / inspection reports, timely submission and action on non-submission / late submission / willful non-submission of control returns, position of NPA levels and recovery, adequacy of security arrangements, time factor in disposal of complaints, quality of customer services, preventive measures against perpetration of frauds, etc.

4.5 Periodical Control Returns -

These returns are the structured communications from the branches to the controlling officials, affording the letter of opportunity to feel the pulse of the former in order to judge their actual health conditions. Control returns are mainly of two types:

With the introduction of Off-Site Monitoring & Surveillance System (OSMOS), Indian banks are required to submit at least the following DSB returns:

Return No.

Description of the Return

Since when operationa-lised

Periodicity

Office to which to be submitted

I

Report on Assets, Liabilities and Exposures

Quarter ended March 1996

Quarterly (last day)

Central Office of DBS

II

Report on Capital Adequacy

-do-

-do-

-do-

III

Report on quarterly Operating Results

-do-

-do-

-do-

IV

Report on Asset Quality

-do-

-do-

-do-

V

Report on Large Credits (Prudential Exposure Norms)

-do-

-do-

-do-

VI

Report on Connected Lending

-do-

-do-

-do-

VIII

statement ON structural Liquidity

Quarter ended June 1999

Quarterly (Last reporting Friday)

-do-

IX

Statement of Interest – Rate Sensitivity

-do-

-do-

-do-

X

Statement of Maturity and Position (MAP)

-do-

-do-

-do-

XI

Statement of Interest Rate Sensitivity (SIR)

-do-

-do-

-do-

--

Bank Profile Return (including RALOO)

-

Annual (31st March)

-do-

Incidentally, in respect of Urban Co-operative Banks, the following statutory returns are usually required to transmit to RBI under various sections of Banking Regulation Act, 1949 (AACS) and Banking Regulation (Cooperative Societies) Rules, 1966:-

Form

No.

Description of the Return

Relevant Section of the Act

Relevant Rules

Periodi-city

Due Date

I

Statement of DTL (including Cash and Liquidity Reserves)

(CRR) 18 (1) & (SLR)24(3)

5

Monthly

15th of the next month

II

Statement of Unsecured Loans and Advances (including Bills Purchased and Discounted) granted to Companies in which any of its directors is interested

20(2)

5

Monthly

Last day of the next month

VI

Statement of offices opened and closed in India

23

8

Quarterly

Within the month from the close of the year

VIII

Return of unclaimed deposits in India – not operated upon for 10 years and more

26

9

Yearly

-do-

IX

Statement of assets and liabilities in India as at close of business on last Friday of every month

27(1)

9

Monthly

Last date of the next month

LX Spl. Re-turn

Statement of Assets and Liabilities as on the date of annual closing of Accounts

27(2)

9

Yearly

As on 3lst March every year

-

Statement of Selected Information i.e. Statement of External Liabilities and Core Assets of the Bank

Each Bank may prescribe the returns to suit its own needs, care being taken to ensure that returns contain all essential information to enable Head Office to have an intelligent study and appraisal of the nature of business done by the branches.

As the efficacy of the system depends on timely submission, delayed and bunched submission of returns should be avoided. Branches habitually default in submission of returns should be dealt with strictly. For timely submission of returns, due date diary is to be maintained in the following form.

Type of Return

Reference

Periodicity

To whom to be sent

Due Date

Date of Despatch

Reasons for delay, if any

1

2

3

4

5

6

7

The Section Officer should check the register at least once a week to ensure timely submission of the returns.

Returns when received should be date stamped and after entering them in Returns Received Register, they should be passed on to the concerned clerks for scrutiny, tabulation and / or compilation.

Returns should be systematically scrutinized in time and contraventions noticed, if any, be brought to the attention of concerned branches and pursued till such defects are rectified.

5 House Keeping :

5.1 Maintenance of Books of Accounts:

(a) Ensure that writing of "Day Book" and postings in "General Ledger" do not fall in arrears under any circumstances.

(b) Books must not be kept open or incomplete.

(c) A trial balance at every day-end should be prepared to see whether postings in the General Ledger have been properly and correctly made.

(d) All the entries in the books of accounts should be checked by a person other than that responsible for their maintenance.

(f) When books are tallied, the vouchers for the day should be properly secured and preserved.

(g) In order to detect errors and to prevent perpetration of frauds, all books of accounts should be balanced at regular periodical intervals.

5.2 Balancing of Books:

Balancing of books has the same status of assurances of book-keeping accuracy as Final Accounts are to a small company. Average periodicity of balancing of books at the branch level is as follows:

Sr.

No.

Name of the Book

Periodicity of

1

Clean Cash Book

Daily

2

General Ledger

Daily

3

Current Accounts

Weekly/Monthly

4

Cash Credit Accounts

Weekly/Monthly

5

Overdraft Accounts

Weekly/Monthly

6

Savings Bank Accounts

Monthly

7

Term Loan Accounts

Monthly

8

Bills Purchased / Discounted

Monthly

9

Fixed Deposit Accounts

Monthly

10

Sundry Deposits Accounts

Monthly/Quarterly

11

Suspense Accounts

Monthly/Quarterly

12

Recurring Deposits

Quarterly

13

Stamp Accounts

Quarterly

14

Inoperative Current Accounts

Half Yearly

15

Inoperative Savings Bank Account

Half Yearly

16

Interest Testing on TDR/STDR/RD

Yearly

While balancing of books, the following points should be borne in mind:-

(a) Generally, balancing of books is to be done by persons other than those maintaining them.

(b) While ordinarily the balancing is to be done on a fixed day every month, the Branch Manager may occasionally, fix a date by surprise for balancing of books.

(c) All the books should be balanced at least once a month, depending upon the volume of transactions involved in each account. The current deposits, overdrafts and Cash Credit Accounts to be balanced every week, whereas other accounts monthly.

(d) A proper record of periodic balancing of books to be maintained by the bank. Whenever balances as per balance register and general ledger do not tally, immediate steps to be taken to locate the difference and tally, otherwise, which may lead to perpetration of fraud.

(e) The Branch Manager may introduce a system of reviewing the work of each section with the sectional heads once a month. Deficiencies noticed together with action taken or proposed to be taken should be regularly reported by him to the controlling offices.

5.3 Reconciliation of Inter-Branch Accounts:

(A) Factors hindering speedier reconciliation of IB Accounts:

(i)

Delay in compilation of branch daily statements at the grass root level, viz. branches which is the basic input for IB reconciliation.

(ii)

Low priority given at the branches to the work pertaining to clarifications in respect of unmatched entries.

(iii)

Errors of punching

(iv)

Delay on the part of outside computer agency engaged by banks for this work

(v)

Over-centralisation of work of IBR at HO

(vi)

Long intervals at which reconciliation / matching process is attempted at Controlling / Head Office, the interval being three months for many banks, and

(vii)

Lack of serious efforts to eliminate old outstanding (unadjusted) entries on the pretext of old records not available or cost factor or time factor.

N.B. Presence of unadjusted entries makes banks quite vulnerable; it could enable unscrupulous people to take advantage of the situation and cause grievous harm to banks.

(B) In order to clear the arrears in reconciliation of IB Accounts, following aspects may be taken into account by banks while devising their own strategy:

(i)

Segregation of large value entries and bestowing special attention for their immediate elimination

(ii)

Computerisation of large and all service branches to ensure correct and speedy reporting

(iii)

Back-office computerization of large branches or preferably, development of a suitable software application package

(iv)

Creation of Special Monitor Cell at Head Office for clearing the backlog and devising procedures for timely reconciliation in future

(v)

Setting of task forces for speeding up reconciliation of IB Accounts in each Zone / Region

Since originating debits are comparatively much fraud-prone than originating credit entries, care should be taken to restrict originating debit entries to :

Cash Remittances / Funds Transfer

Payment of 'Payable at Par' instruments

Purchase of Securities / Capital Assets

Assets Withdrawals from Staff Provident Fund Account

Clearing Transactions by Service / Main Branch

Forex Transactions by Designated Branches etc.

To promote effective concern in reconciliation of debit entries in inter-branch accounts the concept of making provision for net debits outstanding for more than two years has been introduced from the period ended March 2001.

Similarly, to have an effective monitoring on remittance transactions, the banks have been advised not to route on account of such transactions through normal inter branch account but evolve a separate account for this purpose. The banks have also been asked to ensure that outstanding under remittance transactions are reconciled on a weekly basis.

5.4 Reconciliation of Clearing Difference:

(a)

Reconciliation of clearing differences was mainly dependent on timely submission of the following statements :

(i) Form RA (i.e. entries listed but not received), and

(ii) Form PA (i.e. items received but not listed).

Branches should adhere to the discipline and must send those statements to Regional Clearing Centre (RCC)

(b)

Arrangements to be made for proper training of MICR (Magnetic Ink Character Reader) technology to the concerned staff at the training centers of banks for better performance.

(c)

Periodical meetings / seminars / inter action of representatives of Local / Zonal Clearing Centre (LCC / RCC) to be organized for exchange of views / suggestions in improving the working and disposal of pending differences and personal accountability for deviations to be fixed.

(d)

Clearing Imprest is to be reconciled at branches on weekly basis and differences, if any, should be taken up immediately with LCC.

(e)

In-built arrangements should be made available to computerized system at LCC / RCC for maintaining branch-wise clearing differences, so that differences could be perused by submitting list thereof to Regional Offices / Zonal Offices.

(f)

Branches should promptly inform LCC about any instrument received by them directly from other sources.

(g)

Immediate follow-up over telephone as soon as some difference arises.

(h)

Ensuring prompt encoding.

(i)

Conduct of periodical meetings with different officials.

(j)

Effective use of task force in locating and tallying the differences.

6. Security Arrangements:

Security aspects play a pivotal role in internal control system in banks. It's preventive measure to keep the system going on smoothly much more in the desired way of the executors. Several factors contribute to make the security arrangements more effective, viz.

The primary responsibility of detection, reporting and prevention of frauds lies with the bank management. In the opinion of the Reserve Bank, frauds are perpetrated not due to any lacuna in the systems and procedures, but due to non-observance of prescribed safeguards by the bank officials. Persons who are capable of committing frauds are in general extra-efficient, extra-obligating, extra-hard working and intelligent and also prove themselves to be indispensable. Periodical rotation of duties, transfer from one branch to another, strict adherence to proper system of checks and counter-checks of banking operations and constant vigil on actions and behaviors of banking personnel will surely minimize perpetration of frauds.

Incidentally, an Advisory Board on bank frauds was set up by the Governor, RBI with effect from March 1, 1997 under the Chairmanship of Shri S S Tarapore, former Deputy Governor of RBI and five members drawn from areas such as law administration, police, professional accounting and commercial banking. The Board has since converted as Central Advisory Board on Bank Frauds and functions as part of the Central Bureau of Investigation (CBI) of Gopvernment of India. Recently, a study group constituted by the Reserve Bank of India under the Chairmanship of Shri B D Narang, Executive Director, Punjab and Sindh Bank to conduct an in-depth study of the large value frauds in Banks and suggest preventive measures has submitted its report on 24th March 1999 and the Reserve Bank has accepted all the recommendations classified under 14 major heads which will go a long way in prevention / early detection of frauds, if not their total elimination.

8

Vigilance:

8.1

Definition:

The term "Vigilance" is a Latin derivative of "Vigilantia" which literally means to 'keep awake'. In organizational context it is a management function which ensures integrity in the organization by keeping a strict vigil on people and surveillance on systems and procedures in order to prevent any deprival or loss to the organization. Its raison deter is to enhance managerial as also organizational effectiveness.

b) Punitive Vigilance which initiates and / or inflicts punishments on erring employees to discipline them.

8.3

Effects:

Section 46-A of Banking Regulation Act, 1949 envisages that every bank employee, right from Chairman to Peon, is deemed to be a "public servant" for the purpose of Chapter IX of Indian Penal Code and, therefore, is subjected to severe penalties provided in the IPC for committing any offence in his capacity as a public servant. Existence of vigilance machinery in banks and awarding exemplary and deterrent punishment to erring employees for deliberately committing serious offences, e.g. frauds, bribery, tampering with the official records, accepting illegal rebate / commission or receiving illegal gratification in cash or in kind from parties for showing favours in his official capacity, gross dereliction / negligence of duties etc., help toning up overall efficiency, morale and integrity of the bank employees as a whole and smoothen the in-house environs to effectively exercise internal control and house-keeping mechanisms in banks.

9

Conclusion:

Today when banks are limping under the heavy burden of NPAs and their profitability is increasingly on the wane thwarting thereby their very existence in the days to come, it would be a prudent step for the bankers at large to concentrate more on internal control and house-keeping mechanisms so as to make banking institutions as far as practicable internally strong enough to stand on their own legs, customer-friendly enough to leave no ground for customer grievances, moderately transparent enough to see whether any frauds perpetrated at any inopportune moment and corrective measures thereagainst taken forthwith to prevent its recurrence. Simultaneously, it must be seen that productivity of banks/branches should not suffer due to different types of audit / inspection to which they are at present subjected to at least 10 days per month on an average.

To make internal control system more effective and matching with changing time and dimension. I feel, in addition to what I have suggested in earlier paragraphs, banks should guard against at least the following five dominant negative factors:

Sr.

No.

Negative Factors

Resultant Disadvantages

Suggestions

1

Multiplicity of different types of inspection/audit

Branch-timings get lost and productivity per employee suffers

One comprehensive internal audit either by Central office Unit or by external Chartered Accountant firms, and the other, an inspection by RBI/NABARD team only at yearly interval.

2

Different Banks having different guidelines/ procedures to exercise internal control & housekeeping

Bring forth complexities in operations and supervisions

Uniform guidelines for all the banks to follow be made compulsorily

3

Time Norms for Inspection of H.O. and / or Branches not always judiciously fixed

Too short a period often impregnates a tendency to short – circuit the prescribed procedures/rules or regulations which may prove risky afterwards

Time span of inspection should commensurate with the size, nature and volume of business of the inspecting bank/branch

After introduction of prudential norms the focus has been to reduce the NPAs by all banks. Measures to reduce the NPAs include

i)

Recovery of dues,

ii)

Upgradation of sub-standard assets to standard assets

iii)

Compromise in selected cases of NPAs

IV)

Rehabilitation / restructuring of accounts

V)

Write Offs under provisions of the statute

Among the non-legal remedies to reduce NPAs an important one is compromise. Compromise according to Oxford dictionary, is ‘an agreement attained by mutual concession’. As compared to the slow legal process a compromise offers quick solution to reduce the level of NPAs. Compromise can be reached at all the three stages; pre-litigation, post-litigation and post-decree.

Circumstances Warranting Compromise

The following are some of the circumstances when the compromise option could be considered.

i)

Unit is closed for long and is difficult to revive; debit balance keeps on increasing due to penal interest, inspection charges, etc. etc.

ii)

The borrower is absconding and the guarantor is willing to clear the debt if some relief is granted.

iii)

The earning capacity of an otherwise regular borrower is impaired due to some accident.

iv)

The account has gone bad due to circumstances beyond control of the borrower, therefore, the recovery is doubtful.

v)

Primary asset or collateral is not sufficient to cover the outstanding dues.

vi)

Legal costs to recover the dues are likely to be disproportionately high.

vii)

There is a flaw in documentation.

Advantages of Compromise

Recovery through compromise is favoured mainly for the following reasons :

i)

Less cumbersome as compared to the legal action.

ii)

Easy and speedy recovery as it is based on understanding the genuine problems of the borrower.

iii)

The blocked funds are available for recycling and the realized amount is more profitable than deposit mobilization.

iv)

It saves lot of time and manpower of the bank and the banker is motivated as he can get rid of the NPAs and concentrate on other aspects of lending.

Steps in Compromise

The over-riding consideration for the settlement through compromise is to ensure that it is beneficial to the bank. The bank should analyse the costs (sacrifice) and benefits (the realisable amount) on the basis of time value of money comparing the situations as with and without compromise (i.e. by legal action) and thus assess whether the compromise would be beneficial to the bank. Method (steps) to analyse the compromise proposal by applying the discounted cash flow technique (or opportunity cost) is briefly stated below :

1.

Outstanding balance of the loan in the bank’s account books

2.

Pedentilite interest (for the estimated period of 5 years of litigation)

3.

Expenses on the suit filed (insurance, legal fees, etc.)

4.

Total of 1, 2 & 3

5.

Net present worth of the amount of 4 above discounted at the rate of interest as decided by the bank.

6.

The amount offered as compromise.

7.

The interest amount which would be earned on compromised amount by recycling it for litigation period (5 years)

8.

Saving on costs (on Item 3 above)

9.

Total of 6 to 8

10.

Net Present Worth of the amount of 9 above.

11.

Net gain/loss to the bank on compromise = 5-10 or 10-5

Similarly, the effect of the situation without compromise on the banks profitability may be calculated by providing for the annual cost on the suit filed and provisions to be made on sub-standard assets during the litigation period (5 years).

Other steps that may be followed to compromise are listed below :

General Guidelines

i)

Ascertain whether the compromise would be beneficial to the bank.

ii)

Conduct oral negotiations without any commitment by the bank.

iii)

Obtain the proposal of compromise in writing. Also obtain concurrence of the guarantor, if any.

iv)

Obtain letter of acknowledgement of debt both from the borrower and the guarantor.

v)

Obtain concurrence of borrower as well as guarantor on the compromise settlement.

vi)

Based on merits of the case consider concessions discreetly viz. waiver of penal interest, reduction in contractual rate of interest, scaling down the debt amount.

vii)

In case of DICGC covered cases, the compromise offer should be higher than the amount available from the DICGC (in case of already settled account, refund to DICGC its dues after deducting the legal charges incurred, if any).

The bank should lay down certain procedures to ensure efficient functioning of credit administration for maintaining quality of loans and advances. The Reserve Bank of India has issued certain guidelines which include :

i)

The Board of Directors of individual banks should delegate suitable powers to write-off bad debts/compromise to its various functionaries, subject to such safeguards/conditions as the Board may prescribe.

ii)

The authority approving the write-off/compromise should not have sanctioned the loan in his individual capacity.

iii)

Each proposal of compromise/write-off should cover, inter alia, following aspects for consideration by appropriate authority :

a)

That the sanctioning authority had exercised his powers judiciously, adhered to the guidelines of the bank in the matter of granting advances and the normal terms and conditions were stipulated.

b)

That there was no laxity in the conduct of post-disbursement supervision and follow-up of the advances.

c)

That there was no act of commission or omission on the part of the staff leading to the debt becoming NPA

d)

That all possible steps to recover the dues had been taken and there are no further prospects of recovering the debt, and

• A Banker should always demand the entire sum due to it. No banker’s claim is implicit. Making the claim only marks the commencement of negotiation.

Besides above, some further aspects may be taken into account by the bank while framing its policy. These aspects are listed below :

1.

The circumstances and conditions under which any remission in the debt could be made.

2.

The cut-off date from which the question of remission could be considered (one of the possible cut-off dates could be the date on which the loan is classified by the bank as NPA).

3.

The circumstances under which future interest may be waived.

4.

The documentation needed to put the compromise settlement into effect. The documents should always have a default clause stating that in case the borrower does not fulfil the obligation within a specified period of time, the bank has right to revoke the compromise settlement. In case of suit filed cases it is necessary to obtain a decree which should also include a protective clause against default as mentioned above.

5.

While delegating the powers (in this regard) to the various authorities in the bank, mention the safeguards which should be observed while exercising such powers.

6.

A system of accountability should be clearly laid down for pinpointing the factors responsible for an account becoming NPA.

7.

Once decided the compromise steps are needed to be expedited to close the account within specified time frame which should be as short as possible.

8.

The compromise option should be the last resort and should be normally thought of only in respect of casual defaulters or victims of natural calamities. Under no circumstances it should be offered to willful defaulters.

Compromise Agreement

A compromise agreement should incorporate the details of the terms, including the default clause, entered into with the borrower. In addition, the following clauses should be incorporated in it as a preamble :

1.

That the borrowers had borrowed monies under various credit facilities, the details of which, the amounts outstanding inclusive of interest and other charges on the date of this agreement, the terms of repayment, and the securities therefor are given in the schedule to this agreement.

2.

That the borrowers have verified the details including outstanding balances given in the schedule hereto with their books of account and admit, confirm and acknowledge such balances and the securities thereof.

3.

That the various borrowal accounts are out of order as the borrowers have not been able to make the necessary payments therein from time to time and have also been unable to pay the interest and/or other charges from time to time due to business losses etc. incurred and/or suffered by them.

4.

That the borrowers are now sincerely interested to pay and settle their dues to the bank as aforesaid and have requested for certain reliefs and concessions as provided below and the bank has consented and agreed for the same subject to compliance of the borrowers to the terms and conditions provided hereunder.

5.

That the borrowers understand and agree that but for their averments, undertakings and agreements, the bank would not have agreed to allow the below mentioned remissions, concessions and reliefs.

6.

That in the event of any breach of any term of this agreement by the borrowers, all the reliefs, remissions and concessions allowed to them shall be deemed to have been withdrawn by the bank and the original liabilities of the borrowers as shown in the Schedule hereto shall stand reinstated and become payable forthwith by the borrowers alongwith interest and other charges as given in the Schedule from the date of this agreement.

7.

That notwithstanding the withdrawal by the bank of all or any of the reliefs, remissions or concessions as hereunder provided, the securities hereunder provided shall continue as continuing security till the repayment of all the dues by the borrowers to the bank.

8.

That the decision of the bank as to which act or acts of the borrowers constitute(s) a breach of the terms of this agreement shall be final and binding on the borrowers.

Compromise schemes announced by RBI:

– RBI had announced two schemes viz., with outstanding balance of Rs. 10 crore and below & with outstanding balance of more than Rs.10 crore. Regarding the former, guidelines were issued as to fixation of the compromise amount for NPAs classified as Doubtful or loss as on March 31, 2000 as also for NPAs classified as Sub-Standard as on March 31, 2000 which became doubtful or loss subsequently. Similarly guidelines were issued for settlement of NPAs over Rs 10 Crore. However these schemes were one-time settlements and their cut off dates have already lapsed.

– Recent OTS scheme involving small borrowers- RBI has requested the State Govts. to notify the UCBs within their jurisdiction, a simplified mechanism for OTS of loans where Principal amount is less than Rs25000/- and which have become doubtful or loss as on 30 September 2005.RBI has also issued similar circulars to multi-state co-op banks.

Conclusion

The NPAs adversely affect profits and financial viability of banks. Compromise is one of the measures to reduce the NPAs. It has its limitations and may have adverse effects and hence has to be used judiciously with proper understanding of the genuine problems and concerns of each other. The bank and the borrowers can rebuild the trust between them after compromise and start a new relationship for their mutual benefits.

AN OUTLINE OF PROCEDURE TO BE FOLLOWED BY URBAN COOPERATIVE BANKS FOR RECOVERY OF LOANS AND ADVANCES

Necessity of recovey of loan amounts

We are familiar about the working of Urban Co-op. Banks. The Urban Co-op. Banks mobilise deposits from the members of the public. The banks have introduced various deposits schemes which induce the common man to save more money. The Urban Co-op. Banks accept deposits for the purpose of lending. One of the most important functions of the banks is to create credit. Except in a few cases like interest on savings bank deposits and interest on export credit and interest on small loans upto Rs2 lakh which are administered

( under the control of the RBI), most of the interest rates on deposits as well as loans & advances can now be freely set by the banks themselves.

It is the primary duty and function of the Urban Co-op. Banks to safeguard the interest of depositors. Whenever deposits are accepted, the bank agrees and undertakes to repay the amount of deposits with interest to the depositor on maturity. The ownership of the deposit amount vests with the customer and the custody of the deposit amount is with the Banker. So whenever Advances and Loans are sanctioned to shareholders / members of the Bank, the Banker has to take utmost care to see that the Borrower repays the amount of loan with interest so as to enable the Banker to repay the amount of deposit with interest to the customer.

It is with background, it will be clear that the banker must be vigilant about the utilization of the amount of advances and loans made to be shareholders/nominal member. If the Banker is reluctant and negligent towards recovery of loan amounts and advances, it will be very difficult for the bank to repay the amount of "DEPOSIT AMOUNTS" to the customers on maturity.

What is meant by overdues

The Urban Co-op. Banks should exercise caution, necessary checks and adopt detailed scrutiny measures to process loan applications, received from the different shareholders.

This is necessary to ensure that every borrower has a proper repaying capacity for repayment of the amount of loans and advances that would be sanctioned. Securities are also taken to ensure that in case the borrower fails to repay the amount of loan, the securities can be attached and sold out and the debts can be liquidated.

Even with this background, though there is a detailed scrutiny of loan application, it is observed that there are very few cases, where the judgment of the bankers fail. In such 'Fail Cases' the borrowers are not ready and willing to repay the amount of loan, the securities can be attached and sold out and the debts can be liquidated.

We have also studied that whenever loans and advances are sanctioned, the borrowing shareholders nominal members and sureties etc.are required to execute Demand Promissory Note and other allied Loan Agreements such as Deed of Hypothecation, Deed of Mortgage and immovable properties, Deed of pledge etc.

On careful reading the Loan agreements, we observe the following points are stipulated in each Agreement/Bond.

a) Date of sanction of loan

b) Amount of loan sanctioned.

c) Rate of Interest that would be charged.

d) Last date of repayment of loan.

e) Period for which loan is granted.

f) The mode of repayment of loan, i.e on monthly basis / on quarterly basis etc.

g) Rate of penal interest in case there are defaults committed by the borrower in respect of repayment of loan amount.

h) Details regarding securities offered.

Normal measures to be adopted by bank officials for recovery of dues

Whenever, a borrower commits breach of agreement in respect of repayment of schedule of the amount of loans with interest etc., we safely say that there are 'OVERDUES ' in the Loan Account.

Once the Loan A/c is an overdue A/c i.e. the borrower has committed default in repayment of loan amount as per the dates specified in the Agreement, then the Banker has necessarily to adopt measures which will result into recovery of overdue amounts.

We now proceed to suggest certain measures to be adopted by Urban Co-op. Banks for effecting recovery of overdue amounts.

Whenever the borrower commits default in repayment of loan amount, immediately the bank should serve ' Preliminary Notices' on the principal borrower and the sureties advising them to repay the amount of overdues with interest etc. Such Preliminary Notices should invariably mention information which is of factual nature relating to (i) amount of loan sanctioned (ii) date of sanction of loan (iii) Names of the sureties (iv)amount of the loan sanctioned (v) amount of over dues with interest etc. on a particular date. In addition to the above it must also be communicated the bank shall proceed to take further action against the principal borrower and sureties in case of failure to repay the amount of loan/over dues. It has been often said 'A' stitch in time saves nine'. Thus, the banker must be vigilant, right from the disbursement of loan amount till the recovery of the entire loan amount. There should be effective supervision over the amount of loan sanctioned.

Recovery through salary / wages

After issue of such preliminary notices, there may be a positive response from the principal borrower and he may repay the amount of defaulted loan installment, or the principal borrower and the surety may approach the authorities of the bank and may explain their genuine difficulties regarding repayment of loan amount or there may offer to repay the dues partially. There may be cases where there is no response from the borrower / sureties.

With this background, the bank should proceed further to devise such steps which will result in recovery of dues. Under various State Cooperative Acts (e.g. Section 49 of M.C.S. Act 1960) it has been provided that if a member of a society./Bank authorises his Employer to make deduction from his salary/wages, in order to satisfy the claims of the society/Bank, then on receipt of requisition letter from the concerned Bank, the Employer shall proceed to make deduction from the salary/wages from the concerned employee/member to meet the claims of the Bank. The Employer must remit the amount so deducted immediately to the Bank concerned.

Non-compliance of these provisions under the State Cooperative Act shall be constructed as 'offence' and further Civil and Criminal action can be instituted against such Erring Employer.

In addition to the above, there are provisions under the Indian Payment of Wages Act 1936 (vide Section 7(2) and Section 7(2)(j) which stipulates that the Employer shall make deduction from the salary/wages of an Employee to satisfy the claims of the Cooperative Society / Banks.

Settlement of Disputes

Based on the noting of the Management, the Board of Directors may pass a Resolution authorizing the Manager/or such other officer to file "Dispute Application” in the Co-op.Court against the defaulting principal borrower and his sureties. Section 91 of the MCS Act empowers the co-operative courts to decide on ‘Disputes’ and Section 95 further empowers the court to direct attachment of property before announcement of the award which is called Attachment before award or order and interlocutory order if it is satisfied that the parties to the dispute are likely to remove/ dispose off whole or part of his property. Section 95 similarly empowers the Registrar / Officer authorised by him to take the above measures in case of disputes referred to him.

Under Section 96 of the MCS Act, the Co-operative courts after giving reasonable opportunity to the parties to the dispute may make an award on the dispute. The related procedures and documents needed have been detailed below:

The Dispute Application shall consist of following papers/documents etc.

A. A copy of the plaint- the plaint should mention the date of

Loan Application

The date of Promissory Note & other loan agreements, bonds executed in favour of the Bank.

Description of the securities offered.

Details regarding sanction of loan.

Details regarding recovery effected.

Details of the loan amounts outstanding together with interest, penal interest etc.,

Date of issue of notice requesting the borrowings & sureties to repay the entire amount of loan with interest.

In the concluding para of the plaint we have to mention about the 'Prayer Clause' requesting the Hon. Court to grant an Award/Decree in favour of the Bank.

The prayer clause normally consists of following important points -

The opponents may be held responsible to repay the entire amount of loan with interest.

If the opponents fail to pay the amount of loan, the disputant may be entitled to attach the movable and immovable property of the opponents.

The disputant may be entitled to sell the attached property and recover the amount due from the opponents.

Any other orders to meet the ends of justice.

Along with the copy of the plaint, the Bank is required to enclose 'Certified True Copies' of the following documents i.e.

Copy of the Resolution passed by the Board of Directors for filing the dispute in the Co-op. Court.

Copy of the notices issued to the principal borrower and the sureties.

Acknowledgement receipts received from the postal authorities regarding service of notices.

Copies of the promissory note and loan agreement /Bond etc.

A copy of Deed of Mortgage, if any.

Statement of loan account.

Any other papers relevant to the dispute.

A copy of the Treasury challan indicating the amount deposited to meet the Arbitration cost.

On receipt of "Dispute Application" the Court shall issue summons to all the opponents mentioned in the application.

After serving the summons, the opponents are directed to file their ' Written Statement' or 'Say' or ' Reply ' to the ' Dispute Application'.

After carefully reading the plaint and ' Written statement' filed by the opponents the court shall proceed to frame issues ' involved in the dispute'.

The courts shall direct the disputant and the opponents to produce documentary evidences in support of their say or claims etc.

After this, the authorized officer of the Disputant shall stand in the 'Witness Box' and explain the circumstances which led to filing of dispute against the opponents.

The advocates for the opponents are at liberty to do 'Cross-Examination' of the Bank officials.

The opponents are subsequently required to stand in the 'Witness Box' and explain their stand to Hon. Court.

The Bank official or the Advocate is also at liberty to do a cross examination of the opponent.

After this, the Advocate for the disputant and Advocate for the opponent are to make 'Arguments' before the court in support of their claims.

After hearing both sides, the court shall deliver a judgment in the open court.

On the basis of the judgment, a final award / decree shall be passed.

Under section 97 of the MCS Act, an appeal against the decision under Section 96 or order under Section 95 can be made by the aggrieved party to the Co-operative Appellate Court within 2 months from the date of the decision or order.

It is observed that there has been often delay in the Co-op. Court for getting an Award and the leading Cooperators & representatives of Urban Coop. Banks vehemently pressed the State Government to carry out certain amendments for early disposal of cases of Urban Co-op. Banks. In Maharashtra State, the State Government has amended the provisions of section 101 of the Maharashtra State Co-op. Societies Act, 1960.

Power of the Registrar to issue Recovery Certificate: Under the provisions of Section 101 of M.C.S. Act 1960, the Registrar of Co-op. Societies is competent to make an enquiry on the merits of the application made to him by an Urban Co-op. Bank for grant of 'Recovery Certificate' against the borrowers and sureties.

As provided under section 101 of the M.C.S. Act 1960 the Urban Co-op. Bank is required to file an application for grant of 'Recovery Certificate' against the borrower in the office of Registrar of Co-op. Society.

The Registrar of Co-op. Societies shall serve summons to the opponents requesting them to appear before him and explain to him why 'Certificate of Recovery' should not be granted against them.

The Registrar shall apply 'The Principles of summery procedure' for disposal of such cases/applications.

Before issue of 'Certificate of Recovery' the Registrar has to satisfy about following important aspects -

I) The opponents are members/Nominal Members of the Society / Bank.

II) That the opponents have borrowed money from the Society / Bank.

III) That the opponents have committed defaults in repayment of loan amounts and that they are in 'ARREARS'

IV) The Registrar, shall grant a Certificate that the opponents are in arrears and are responsible to pay the amount to the society with interest, cost of recovery etc.

Once, 'The Certificate of Recovery' is issued it becomes 'Final'. The word 'Final' denotes that it is not appealable in any Court of Law.

Thus, in short the application under Section 101 is similar to that of 'dispute application'. We are required to enclose all the papers relevant to documents etc., alongwith the application under Section 101.

The Urban Co-op. Banks, after obtaining awards are required to execute the same so as to recover the decreetal amount from the opponents.

In Maharashtra, there are special provisions under the Maharashtra Co-op. Societies Act, 1960. Under Section 156 of the M.C.S. Act 1960 the Registrar or a person empowered by the Registrar, is Competent to execute the awards against the opponents.

There are following broad methods / measures by which an award can be executed.

By issue of Demand Notice to opponents directing them to repay the entire amount as mentioned in the award.

By attachment of movable property.

By sale of movable property.

By attachment of immovable property.

Without attachment, in case of Mortgage Decree, immovable property can be sold out.

The Registrar of Co-op. Societies in Maharashtra State, has also empowered the officials, not below the rank of Branch Manager of Urban Co-op. Banks, to exercise the powers under Section 156 of M.C.S. Act 1960 read with Rule 107 of M.C.S. Rules 1961.

Debt Recovery Tribunal – The Debts Recovery Tribunals were established by the Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and recovery of debts due to banks and financial institutions. Accordingly the DRTs were set up in different parts of the country as per the Recovery of Debts due to banks and Financial Institutions Act, 1993 and Debts Recovery Tribunal (Procedure) Rules, 1993.

As per the provisions ( Section 19) of the DRT Act , banks and financial Institutions could apply to the Tribunal for recovery of debts of Rs 10 Lakh or more by making an application called Original application to it. The Tribunal has powers to pass an interim order preventing the borrower from selling/ disposing off / tampering with the property and can pass orders for attaching the properties of the borrower in case it is satisfied that the latter may sell/ dispose off whole or part of the property. Further the Tribunal has powers to appoint a receiver for taking care of the property.

Issue of Decree under section 19(20) of the Act- The Tribunal, after giving opportunities to both the parties, issues an order directing the borrower to pay a specific amount to the bank. Based on the order, the Tribunal then issues a certificate of recovery to the Recovery Officer. The RO can then proceed to recover the amount by attachment & sale of property or by appointment of receiver for management of the property in terms of section 25 of the Act. As per Section 20 of the Act, the aggrieved party can file an appeal against the order of the DRT before the Appellate Tribunal within 45 days.

Recent Judgement of a three member bench of the Supreme Court:

The Supreme Court held that Cooperative banks can recover outstanding loans only through the mechanism provided in State cooperative laws and need not approach the Debts Recovery Tribunal. The Bench pointed out that the reason for excluding cooperative banks from the purview of the RDB Act seemed to be that they had comprehensive, self-contained and less expensive remedies available under the State Co-operative Societies Acts, while commercial banks and financial institutions had to file suits in civil courts. The RDB Act was, therefore, designed to deal with other banks and financial institutions, which had to have recourse to the time-consuming process of civil courts. The bench held that If cooperative disputes also went to the tribunals, they would be overburdened and the whole object of speedy recovery of debts due to banks and financial institutions would be defeated. In conclusion, unless this decision of the bench is revised, the co-operative banks can not recover their loans through the DRTs.

SARFAESI Act, 2002

There are 3 objectives of the Act viz., to regulate:

– Securitization and

– Reconstruction of financial assets and

– Enforcement of security interest.

From the point of view of the UCBs, the ‘Enforcement of security interest’ is of particular importance and use for recovery of their bad loans. The specialty of the Act is that the security interest can be enforced without intervention of the courts subject to procedures being followed as per provisions of the Act and the related Rules.

Procedure to be followed:

Under Section 13(2) of the Act, a 60 days notice has to be served by the bank on the borrower with a request to discharge the loan liability

The notice must contain details of :

amount payable by the borrower;

ecurity interest intended to be enforced.

on receipt of notice, if the borrower makes a representation or raises an objection, the secured creditor must consider such representation or objection.

if the secured creditor comes to the conclusion that the said representation or objection is not acceptable or tenable, he must communicate the reasons for non-acceptance of representation or objection within one week of receipt of the above.

MODES OF RECOVERY AVAILABLE (S.13(4))

If borrower fails to discharge the liability, secured creditor has the following options

Take possession of secured asset

Take over the management of the business of the borrower including

The right to transfer by way of lease, sale, assignment, etc.

The said rights must be exercised only where substantial part of business of borrower is held as security for the debt.

Appoint a manager to manage the security asset taken over.

Issue notice to persons who acquired the secured asset from the borrower or from whom money is due.

The CMM( chief metropolitan magistrate)or DM

(district magistrate)is empowered even to use

force necessary for taking steps towards

securing compliance

Non-application under the Act- Section 31 -The exemptions under this Act i.e. properties which can not be attached have been detailed in the schedule to the Act. Some of the important ones relevant for the UCBs are:

Any security interest securing repayment of any financial assistance not exceeding Rs.1 lakh.

Security interest not registered under this Act.

Any security interest created in agricultural land.

A lien on any goods, money or security given under the Indian Contract Act, 1872

A pledge of movables u/s 172 of the Indian Contract Act

Any conditional sale or hire-purchase or lease or any other contract in which no security interest has been created.

Rights of unpaid seller u/s 47 of Sale of Goods Act.

Properties not liable to attachment under s.60 of cpc 1908 excluding properties specifically charged for raising the loan.

The amount due is less than 20 per cent of the principal and interest

RIGHT TO APPEAL: Under the Act, the borrower can appeal before DRT by paying the fee within 45 days (S.17). The appeal can be entertained only when the borrower deposits fifty per cent of the amounts claimed in the notice.

DRT can consider the legality of action taken by the bank. If it finds it wrongful, it can restore the business or management to the borrower. If , however, the DRT finds that the action taken by the bank is as per the provisions of the law , then the bank/ secured creditor can proceed to take action under Section 13(4) of the Act. The application has to be disposed of by the DRT within 60 days and if its pending for four months, either the bank or the borrower can appeal to the Appellate Tribunal for expeditious Tribunal.

An application for recovery of balance amount, if any, by secured creditor can be presented to the debt recovery tribunal by the authorised officer (AO)of the bank or can be sent by registered post addressed to the registrar of debt recovery tribunal.

Appeal to the APPELLATE TRIBUNAL under Section 18:

Persons aggrieved by the order of DRT to prefer an application before the appellate tribunal within 30 days.

The appellate tribunal is vested with power to reduce the deposit amount to not less than 25 percent.

Miscellaneous aspects: No civil court has any jurisdiction under this Act.

The Indian Limitation Act, 1963 is applicable to this Act.

The SARFAESI Rules specify as to who should be the AO of a bank, the place of serving of the Demand Notice , the mode of its delivery, measures to be taken if the amount mentioned in the notice is not paid- the manner of takeover of possession of property, steps to be taken thereafter, custody of property, manner in which the property could be sold, the manner of valuation of assets, serving of notice before sale & the contents of the sale notice, sale of assets & issuance of certificate of sale, appointment of Manager, procedure for recovery of shortfall of amount due to the bank.

A judicious of the available measures will greatly facilitate recovery of loans in banks.